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Author: 


New  Hampshire. 


Title: 


Special  report  of  the  bank 
commissioners  of... 

Place: 

Concord 

Date: 

1896 


MASTER   NEGATIVE   * 


COLUMBIA  UNIVERSITY  LIBRARIES 
PRESERVATION  DIVISION 

BIBLIOGRAPHIC  MICROFORM  TARGET 


ORIGINAL  MATERIAL  AS  FILMED  -    EXISTING  BIBLIOGRAPHIC  RECORD 


Business 

D986 

G76 


New  Hampshire.     Board  of  bank  commissioners. 

Special  report  of  the  bank  commissioners  of 
New  Hampshire,  March,   1896,   concerning  the 
Granite  state  provident  association,   of  Man- 
chester, H.  H.     Concord,  Printed  by  the  Rep\ib- 
lican  press  association,   1896. 

44  p. 

Signed:  ATpheias  W.  Baker,   John  Hatch,  Ihomaf 
J.  Walker,  bank  commissioners. 


RESTRICTIONS  ON  USE: 


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SPECIAL  REPORT 


OF  THE 


f^ -BANK    COMMISSIONERS 


I . « 


OF 


NEW    HAMPSHIEE, 


MARCH,  1896, 


CONCERNING   THE 


GRANITE  STATE  PROVIDENT  ASSOCIATION, 


OF  MANCHESTER,   N.  H. 


i 


CONCORD,    N.   H.: 

PRINTED    BY   THE    REPUBLICAN    PRESS    ASSOCIATION 

1896. 


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SPECIAL  REPORT 


OF  THB         • 


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BANK    COMMISSIONERS 


OF 


I     . 


NEW    HAMPSHIRE, 


MARCH,  1896, 


CONCERNING   THE 


GRANITE  STATE  PROVIDENT  ASSOCIATION, 


OF  MANCHESTEK,   N.  H. 


CONCORD,    N.    H.: 

PRINTED    BY    THE    REPUBLICAN    PRESS    ASSOCIATION 

1896. 


V-    .11-.     ^J,. 


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EEPOET. 


To  His  Excellency  the  Governor : 

The  bank  commissioners  respectfully  report  that  they 
have  made  an  examination  of  the  affairs  of  the  Granite 
State  Provident  Association,  as  of  January  7, 1896,  and  find, 
that  under  a  charter  granted  by  the  legislature  of  this  state 
in  August,  1881,  with  an  amendment  in  September,  1887, 
reviving  and  continuing  in  force  the  original  charter,  it  is 
empowered  to  carry  on  the  business  of  life  insurance ;  or  in- 
surance against  personal  injuries  ;  or  to  grant,  sell,  or  pur- 
chase annuities,  endowments,  contingent  rights,  reversions  or 
remainders  ;  or  to  furnish  assistance  to  persons  incapacitated 
or  disabled  by  sickness  or  accident ;  and  of  acquiring  by  pur- 
chase, lease,  mortgage,  or  otherwise,  real  estate  and  personal 
property,  or  disposing  of  the  same,  "  and  otherwise  acting  as 
a  building  association,  enabling  members  to  purchase  or  build 
their  own  houses."  The  charter  also  provides  that  the  cor- 
poration shall  carry  on  business  solely  on  the  mutual  plan, 
and  that  all  surplus  and  profits  arising  from  the  business 
shall  be  ratably  distributed  among  its  members,  and  grants 
them  the  power  to  enact  by-laws  for  their  organization  and 
management,  as  well  as  for  the  application  of  its  profits  as 
before  provided. 

The  association  first  commenced  business  as  a  co-operative 
bank,  or  building  and  loan  association,  in  the  fall  of  the 
year  1888. 

In  the  by-laws  adopted  December  5, 1887,  it  was  provided 
that  the  business  should  be  carried  on  upon  the  plan  set 
forth  in  the  publications  of  the  American  Allotment  Asso- 
ciation of  New  York,  which  appears  to  be  a  corporation 
organized  in  1887,  by  Geo.  P.  Stewart,  Clark  M.  Eggleston, 
and  George  L.  Pierce,  under  a  statute  of  the  state  of  New 
York  authorizing  the  formation  of  corporations  for  manufac- 
turing, mining,  mechanical,  or  chemical  purposes.  The 
objects  for  which  the  company  was  formed  are  expressed  to  be 
for  the  purpose  of  taking,  holding,  and  possessing  real  estate 


3  p  Q  c;  p  ^ 

J  O  u  u  c  --' 


and  buildings,  and  selling,  leasing,  and  improving  the  same 
in  such  manner  as  may  be  determined  by  its  by-laws,  and  in 
conjunction  with  the  several  like  state  organizations  having 
their  registry  and  equation  in  the  Joint  States  Agency  Co.,  in 
the  city  of  New  York,  and  in  accordance  with  its  constitu- 
tion and  by-laws.  The  Joint  Agency  Co.,  referred  to,  was 
a  corporation  organized  two  years  later  in  1889,  by  Clark 
M.  Eggleston,  G.  Percival  Stewart  and  others  in  the  state  of 
New  York  for  the  purpose  of  '•  acting  as  general  agents  in 
establishing,  promoting,  extending,  and  conducting  of  the 
business  of  other  corporations  for  certain  stipulated  commis- 
sions or  other  compensation,  to  be  paid  by  the  corporation  for 
which  such  services  may  be  rendered."  When  it  is  under- 
stood that  the  promoters  of  these  organizations  have  been 
the  leading  officers  of  the  Granite  State  Provident  Associa- 
tion, it  will  be  seen  from  what  source  its  methods  of  busi- 
ness were  derived. 

The  by-laws,  as  amended  March  2,  1889,  provided  that 
every  shareholder  for  each  share  owned  by  him  should  be 
entitled  to  have  purchased  for  him  property  to  the  value  of 
1200,  and  whenever  the  funds  in  the  treasury  should  war- 
rant, the  money  should  be  used  in  purchasing  for  the  mem- 
bers homes,  farms,  or  business  properties,  which  properties 
should  be  sold  to  the  members  on  small  weekly  or  monthly 

payments. 

By-laws  adopted  in  June,  1889,  provided  for  the  division 
of  an  extensive  and  diverse  business  into  an  insurance 
department,  building  club  department,  building  loan  depart- 
ment, etc.,  and  it  was  not  until  1890,  that  the  by-laws  seem 
to  have  been  modified  to  meet  the  purpose  of  the  business 
of  a  co-operative  bank. 

If  the  intention  of  the  legislature  in  granting  this  charter 
to  the  corporation  is  sought  for  in  the  light  of  the  interpre- 
tation placed  upon  it  by  the  association  in  its  early  by-laws, 
it  is  doubtful  if  the  right  to  conduct  the  business  of  a 
co-operative  bank,  sometimes  called  a  building  and  loan 
association,  was  conferred  by  the  words,  "  otherwise  acting 
as  a  building  association,  enabling  members  to  purchase  or 
build  their  own  houses." 

BUSINESS   OF   THE   ASSOCIATION. 

The  present  business  of  the  association  consists  in  the 
issuing  of  shares  to  its  members  under  varying  conditions  of 


w 


contract,  requiring  monthly  payments  until  such  payments 
with  the  profits  of  the  association  mature  the  shares  to  the 
par  value  of  $^200  wlien  the  holder  has  the  right  to  withdraw 
that  amount  of  money,  or  if  a  borrower,  have  his  note 
cancelled  and  mortgage  surrendered.  There  are  some  thirty- 
three  different  forms  of  contracts  in  force ;  but  since  1895, 
there  have  been  substantially  but  two  kinds  issued. 

Of  the  principal  contracts  in  force  there  is  what  is  known 
as  the  eight  year  maturity  contract,  in  which  the  association 
has  guaranteed  that  the  shares  shall  mature  in  eight  years, 
when  the  member  shall  receive  $200  as  soon  as  outstanding 
obligations  may  be  collected  to  enable  the  association  to  pay 
this  sum,  pending  which  the  holder  shall  receive  one  half  of 
one  per  cent,  interest  a  month  for  each  month's  delay. 
There  are  outstanding  at  the  present  time  about  one  thous- 
and of  these  shares. 

Another  form  of  contract  provides  that  the  shareholder 
shall  pay  into  the  association  one  dollar  per  month  for  every 
share  owned  by  him  for  seven  years  from  the  date  of  the 
certificate,  when  his  payments  cease  ;  and  a  similar  one 
provides  for  the  payment  for  eight  years.  His  money 
remains  with  the  association  until  the  profits  added  thereto 
mature  his  share  to  $200,  when,  as  in  the  above  guaranteed 
contract,  it  will  be  paid.  Of  these,  there  are  now  outstand- 
ing about  two  thousand  shares. 

There  are  also  in  force  what  are  known  as  three  and  four 
year  contracts,  having  a  guaranteed  withdrawal  cash  value 
printed  upon  them,  one  form  of  which  guarantees  the  return 
of  the  member's  money  after  thirty-six  payments  have  been 
made,  and  another  the  return  of  the  member's  money  after 
forty-eight  payments.     (See  pages  5,  6,  and  7,  Morse.) 

In  the  three  year  contracts  there  is  a  condition  that  the 
holder  at  the  expiration  of  any  six  months  period  may 
receive  the  cash  surrender  value  of  his  shares  in  money  or  a 
withdrawal  certificate,  as  he  may  elect,  according  to  the 
table  printed  thereon.  At  the  end  of  thirty-six  months  the 
cash  withdrawal  given  upon  the  table,  equals  the  total  sum 
paid  in  by  the  member,  but  exceeds  the  net  amount  to  the 
association  by  that  taken  for  expenses  ;  and  at  longer 
periods  up  to  ninety  months  a  still  larger  cash  withdrawal 
is  guaranteed.  In  these  contracts  the  payments  of  dues  are 
limited  to  eight  years. 

In  the  four  vear  contracts  there  is  a  provision  that  losses 


may  be  deducted  from  the  amount  which  a  member  may 
withdraw  at  the  end  of  the  four  year  period  ;  but  upon  the 
back  of  the  certificate  is  printed  a  table  showing  the  amounts 
of  the  cash  withdrawal  value  at  certain  periods,  and  under 
this  table  a  note  stating  that  the  above  values  are  guaranteed, 
and  bear  no  relation  to  the  book  value  of  the  shares.  These 
certificates  thus  contain  conflicting  conditions,  and  it  is 
uncertain  how  much  a  member  would  receive  under  them. 
(See  page  8,  Morse.)  There  are  about  ten  thousand  of  these 
shares  in  force. 

Another  form  of  contract,  used  only  in  the  state  of  Maine, 
guarantees  $QQ  per  share  after  payments  have  been  made 
for  sixty  months,  (see  page  8,  Morse),  of  which  about  ten 
thousand  shares  are  in  force. 

A  few  contracts  are  in  force,  not  exceeding  fifty  shares, 
which  provide  for  the  re-payment  of  the  amount  paid  in  on  de- 
mand, with  six  per  cent,  interest.  On  these  contracts  the  mem- 
ber paid  an  admission  fee  of  II,  which  cannot  be  withdrawn. 
Other  contracts  provide  that  the  members  may  withdraw 
the  amount  paid  in  by  them,  at  the  expiration  of  one  year, 
and  at  the  expiration  of  three  years,  less  expenses,  fines,  and 
losses,  if  any,  which  deductions  were  not  provided  for  in  the 
other  contracts  mentioned. 

It  is  possible  for  holders  of  these  three  and  four  year  con- 
tracts, and  the  guaranteed  $<^6  withdrawal  contract  (see 
Maine  contract,  marked  "  H,")  to  demand  of  the  association 
more  money  than  it  has  received ;  and  a  liability  is  thus  estab- 
lished which,  with  the  large  number  of  shares  of  this  class 
of  certificates  in  force,  must  be  a  constant  menace  to  the 
association. 

The  seven  and  eight  year  contracts  provide  that  after  two 
years  a  member  may  withdraw  the  value  of  shares  together 
with  six  per  cent,  interest ;  and  also  in  case  of  default  in 
payments  a  member's  shares  may  be  declared  forfeited,  in 
which  case  he  shall  be  entitled  to  receive  all  moneys  paid 
in  by  him  on  said  shares,  less  fines,  and  his  proportion  of 
losses  and  expenses.  It  has  been  the  practice  of  the  asso- 
ciation to  pay  withdrawing  members  on  these  shares  the 
amount  paid  by  them,  with  interest,  without  any  deduction 
for  expenses ;  and  the  question  arises  whether  the  practice 
of  the  association  in  this  respect  has  not  placed  a  construc- 
tion upon  the  conditions  of  the  contract  regulating  with- 
drawal that  will  be  binding  upon  them. 


These  contracts  of  the  association  which  provide  for  the 
payment  of  a  fixed  amount  at  a  certain  time,  without  pro- 
viding for  the  deduction  of  expenses  or  losses,  are  beyond 
the  power  of  the  association  to  fulfil,  and  all  such  payments 
have  been  made  at  a  loss.  It  is  not  clear  that  even  theore- 
tically the  association  would  have  been  able  to  comply  with 
these  methods  of  business  without  loss ;  and  as  they  destroy 
the  idea  of  mutuality  between  the  members,  the  question 
arises.  Are  they  valid  contracts? 

Pending  the  present  examination  by  the  commissioners, 
the  Association  has  voted  to  re-organize  its  business  and  to 
make  no  payments  to  withdrawing  members  beyond  the 
actual  value  of  their  shares  as  shown  at  the  time  of  such 
withdrawal,  notwithstanding  any  guarantee  on  their  part  of 
a  fixed  withdrawal  value  or  promise  to  pay  the  same. 

PAID-UP   STOCK. 

In  order  to  obtain  a  more  rapid  accumulation  of  money 
upon  which  to  do  business  than  the  instalment  shares  will 
produce,  the  Association  has  made  other  contracts  in  the 
form  of  full-paid  or  part-paid  stock.  They  have  in  force 
about  $5,000  of  fully-paid  stock  bearing  10  per  cent,  interest, 
and  also  about  118,000  of  stock  upon  which  $100  has  been 
paid,  known  as  half-paid  stock,  bearing  8  per  cent,  interest 
per  annum  upon  the  amount  paid  in,  and  which  participates 
in  the  full  profits  until  such  stock  stands  at  its  par  value  of 
$200,  when  it  may  be  withdrawn,  and  the  sum  of  $200  will 
be  paid  to  the  holder.  They  have  also  stock  at  6  per  cent., 
7  per  cent.,  and  8  per  cent,  interest  which  participates  in  the 
piofits  above  the  agreed  interest  rate  if  allowed  to  remain 
for  a  period  exceeding  five  years.  Of  this  stock  there  is 
about  $300,000  in  force.  There  is  also  $114,000  of  fully 
participating  stock,  upon  which  the  holder  receives  his  pro 
rata  share  of  the  earnings  of  the  Association,  which,  how- 
ever, is  guaranteed  to  not  be  less  than  6  per  cent,  per  annum. 
(See  pages  9  and  10,  Morse).  There  is  also  a  small  amount 
of  trustee  stock  bearing  6  per  cent,  interest,  for  the  security 
of  which  mortgages  are  held  in  trust  by  the  Continental 
Trust  Co.  of  New  York ;  and  also  stock  bearing  6  per  cent, 
and  7  per  cent,  interest  which  does  not  participate  in  the 
profits  of  the  Association.  This  latter  stock  is  simply  a 
note  of  the  Association  for  so  much  money  borrowed  by  it, 
and  amounts  to  about  $54,000. 


>' 


8 


There  is  another  class  called  instalment  shares,  providing 
for  instalment  payments  of  i20  each.  This  is  nothing  more 
than  paid-up  stock,  and  is  an  evasion  to  call  it  otherwise. 
Most  of  this  paid-up  stock  is  issued  with  the  agreement  that 
the  money  paid  may  be  withdrawn  by  the  holder  after  two 
and  three  years,  and  some  of  it  at  any  time  on  demand ; 
but  there  is  no  provision  for  the  deduction  of  expenses  or 
losses. 

It  is  against  the  plan  of  building  and  loan  associations 
that  capitalists,  under  pretense  of  philanthropy  or  any  other 
ground,  should  be  allowed  to  invest  their  money  at  a  greater 
rate  of  interest  than  could  be  obtained  through  the  ordinary 
channels  of  investment ;  and  while  it  is  claimed  by  the 
Association,  and  supported  by  authorities  upon  building  and 
loan  association  law,  that  they  have  the  right  to  issue  paid- 
up  stock,  and  that  the  holders  are  partners  in  the  Association 
with  the  instalment  shareholders,  it  may  be  questionable 
whether  under  the  limitation  of  its  charter  an  unequal 
share  of  the  profits  can  be  given  to  the  holders  of  these 
classes  of  paid-up  stock.  At  the  present  time  only  two 
forms  of  paid-up  stock  are  issued,  namely  :  the  trustee  stock 
and  the  straight  fully-paid  $100  par  value  stock,  bearing  6 
per  cent,  interest,  of  which  about  $30,000  has  been  issued. 
(See  pp.  9,  10,  11,  and  50  Morse.) 

MORTGAGES. 

The  money  thus  obtained  by  the  Association  is  invested 
by  it  in  loans  to  its  members  upon  a  pledge  of  shares,  which 
must  be  owned  by  them,  of  a  par  value  equaling  the  total 
loan,  and  upon  which  payments  must  have  been  made  for 
six  months,  and  a  mortgage  of  such  real  estate  as  may  be 
approved  by  the  Association. 

In  building  and  loan  associations  it  was  the  theory  that 
all  shareholders  would  at  some  period  become  borrowers; 
and  as  the  bulk  of  the  profits  are  derived  from  the  borrow- 
ing members,  an  undue  proportion  of  investors  throws  a  dis- 
proportionate burden  upon  the  members  for  whose  benefit 
building  and  loan  associations  are  designed.  It  appears 
that  at  the  present  time  in  this  association  the  shareholders 
number  18,000,  and  with  a  total  number  of  shares  outstand- 
ing of  90,000,  while  the  number  of  borrowers  is  but  1,700, 
representing  12,650  shares. 

The  care  with  which  the  mortgage  security  is  examined 


by  the  Association  before  making  a  loan  is,  and  with  a 
business  extending  over  the  whole  country  from  Maine  to 
Texas  must  necessarily  be,  superficial ;  and  great  opportunity 
is  afforded  to  unscrupulous  persons  to  deceive  the  Associa- 
tion as  to  the  character  of  the  real  estate  pledged  for  the 
loan.  Reliance  is  placed  upon  the  reports  of  the  local  sub- 
agents,  who  are  interested  to  the  extent  of  fees  and  com- 
missions to  make  the  loan,  and  also  upon  the  reports  of  the 
local  members,  who  may  be  careless  in  their  replies,  or  in- 
terested to  obtain  loans  themselves,  and  who  expect  equally 
favorable  reports  from  their  associates.  The  safeguards 
provided  by  the  rules  of  the  Association  are  only  safe-guards 
when  honestly  administered ;  and  too  often  the  application 
of  the  rules  is  left  to  the  borrowers  themselves.  For  in- 
stance,— in  the  city  of  Rochester,  N.  Y.,  there  has  been 
loaned  $3«8,539.88  upon  the  representations  or  solicitations 
of  the  agents  and  members  in  that  locality,  when  only 
$5,000  stood  to  the  credit  of  the  whole  membership  in  that 
city  upon  the  books  of  the  Association  and  all  but  442  shares 
are  in  default.  Notwithstanding  which,  a  loan  was  made 
within  the  past  twelve  months  of  $16,000,  |3,000  being  ad- 
vanced by  the  Association,  together  with  the  interest  upon 
the  first  mortgage  held  by  the  Mutual  Life  Insurance  Co., 
for  $13,000,  upon  property  which  the  inspector  of  the  Asso- 
ciation now  reports  is  insufficient  to  pay  the  first  mortgage, 
and  the  member  after  one  month's  payment  went  into  in- 
solvency. 

The  bank  commissioners  of  Massachusetts  in  their  report 
of  1895  point  out  the  danger  of  too  wide  a  field  of  invest- 
ment by  co-operative  banks,  and  say  that  if  the  investments 
cannot  be  made  in  secure  loans  on  property  in  the  city 
where  the  bank  is  located,  its  idle  capital  should  be  elimi- 
nated. Where  a  co-operative  bank  has  to  invest  its  funds 
otherwise,  it  has  outgrown  its  usefulness,  and  is  encroach- 
ing upon  the  business  of  the  savings  banks. 

An  instalment  mortgage  is  made  by  the  borrower  pro- 
viding for  the  monthly  payment  of  his  dues  upon  the  stock 
pledged  and  of  the  monthly  payments  of  interest  upon  the 
loan  at  the  rate  of  6  per  cent,  or  $1  for  each  $200  loaned, 
and  also  of  a  premium  upon  each  $200  loaned  varying 
from  50  cents,  to  $1  a  month,  until  the  payments  of 
dues  together  with  the  profits  of  the  Association  shall 
mature  the  shares  pledged,  and  thus  cancel  the  indebted- 


10 


11 


ness.  There  have  been  some  loans  made  upon  a  different 
rate  of  premium  than  the  above,  and  some  loans  made  upon 
a  gross  premium,  which  was  deducted  from  the  face  of  the 
loan  at  the  time  it  was  made. 

GROSS   PREMIUMS. 

The  gross  premiums  thus  received  by  the  Association 
have  amounted  to  $107,382.60 ;  but  this  plan  of  gross 
premiums  has  not  been  made  use  of  for  some  time.  Although 
the  contracts  contain  no  provision  for  refunding  to  the  bor- 
rower any  portion  of  the  gross  premium  in  case  he  should 
pay  the  loan  before  the  maturity  of  his  shares,  it  has  been 
the  practice  to  refund  a  proportionate  part  of  the  gross 
premium ;  and  in  certain  states  where  they  do  business  it 
is  understood  that  they  are  compelled  to  do  so  by  law.  As, 
however,  the  total  premium  received  has  been  made  use  of 
in  apportioning  profits  to  the  members,  the  re-payment  of 
any  part  to  one  is  a  loss  to  the  others.  Some  f  15,000  has 
thus  been  refunded  ;  and  the  question  arises  how  this  loss 
should  be  provided  for — whether  it  should  be  charged  to  the 
members'  capital  dues,  deducted  from  the  surplus,  or  made 
good  from  the  $100,000  fund  established  for  the  payment 
of  liabilities  of  the  Association. 

FIRST  MORTGAGES. 

To  avail  themselves  of  the  largest  earning  capacity  of 
their  capital  possible,  the  association  has  adopted  a  plan  of 
taking  from  the  borrower  a  first  mortgage  upon  his  property 
of  from  one  third  to  three  fourths  of  the  amount  loaned  to 
him,  and  of  selling  this  mortgage  for  its  face  with  their 
guaranty  of  its  payment,  or  of  obtaining  some  third  party 
to  take  the  first  mortgage  at  the  time  the  business  is  trans- 
acted, and  only  advancing  in  cash  to  the  borrower  the 
difference  between  the  amount  of  the  first  mortgage  and 
the  amount  the  member  desires  to  borrow,  entering  into  an 
agreement  with  the  member  that  if  he  will  promptly  fulfil 
his  contract  of  monthly  payments  it  will  assume  and  take 
care  of  the  first  mortgage  for  him  when  it  becomes  due,  as 
well  as  the  interest  upon  it.  By  this  means,  on  a  loan  of 
$1,000  the  investment  is  but  $300,  and  it  receives  from  the 
borrower  interest  and  premium  amounting  to  12  per  cent, 
per  annum  upon  $1,000,  and  it  pays  to  the  holder  of  the 


first  mortgage  of  $700  interest  at  the  rate  of  from  5  per 
cent,  to  6  per  cent,  per  annum,  thus  making  a  profit  upon  its 
investments  of  at  least  26  per  cent,  per  annum,  as  well  as 
receiving  $60  a  year  upon  the  principle.  (See  pages  2  to 
7,  Morse.)  In  some  instances  the  first  mortgage  has  already 
been  placed  by  the  borrower  upon  his  property  previous  to 
his  becoming  a  member,  and  the  Association  has  no  labor 
in  placing  it. 

Most  of  the  first  mortgages  made  at  the  time  the  member 
borrows  of  the  Association  run  for  five  years,  and  where  they 
average  $600  or  $700  on  $1,000,  the  payments  by  the  bor- 
rower at  the  end  of  five  years  are  insufficient  to  meet  them. 
(See  page  6,  Morse.)  There  are  $114,450  of  first  mort- 
gages payable  on  demand. 

The  statement  of  the  assets  of  the  Association  will  show 
that  of  a  total  mortgage  investment  of  $2,530,140.64  there 
have  been  $1,361,604.67  of  first  mortgages  sold  or  placed  in 
the  hands  of  third  parties,  leaving  a  large  portion  of  the 
assets  of  the  Association  invested  only  in  equities.  While 
such  a  plan  is  calculated  to  produce  large  returns  for  the 
money  invested,  it  introduces  an  element  of  great  danger  as 
regards  the  solvency  of  the  institution.  If  from  any  dis- 
turbing cause  the  members  should  delay  or  default  in  their 
regular  payments  of  dues,  interest  and  premium,  the  Asso- 
ciation would  be  without  means  of  paying  the  interest  upon 
the  first  mortgages  or  to  meet  them  as  they  became  due, 
unless  the  Association  obtained  funds  from  new  subscribers 
for  shares.  Any  default  in  the  payment  of  interest  upon 
the  first  mortgages  would  be  likely,  where  a  general  state 
of  distrust  existed  in  regard  to  the  institution,  to  cause  im- 
mediate foreclosures  ;  and  it  is  very  certain  from  the  char- 
acter of  the  property  mortgaged  by  its  members  that  the 
equities  would  be  of  little  or  no  value. 

SHARE   LOANS. 

The  Association  also  makes  loans  upon  the  security  of  its 
shares,  obtaining  6  per  cent,  interest  and  6  per  cent,  prem- 
ium from  the  borrower.  The  books  of  the  Association 
show  $14,066  loaned  to  members  upon  pledge  of  their 
shares.  Several  of  these  loans  are  in  excess  of  the  book 
value  of  the  shares  pledged.  As  the  value  of  shares  is 
liable  to  be  reduced  at  any  time  by  reason  of  losses,  this  se- 
curity is  of  questionable  value. 


i 


I 


12 


FINES. 


If  a  member  does  not  promptly  make  the  payments  provided 
for  in  his"con tracts,  he  is  fined  at  the  rate  of  5  per  cent,  per 
month  on  each  dollar  in  arrears  of  dues,  interest  and  premium. 
For  instance,  if  a  member  is  three  months  in  arrears  in  his 
payments,  he  owes  5  cents  on  every  dollar  for  the  first  month, 
and  10  cents  on  everv  dollar  for  the  second  month,  and  15 
cents  on  every  dollar  for  the  third  month,  or  30  cents  for  three 
months,  and  so  on,  which,  if  continued  indefinitely,  operates 
to  lapse  or  wipe  out  a  member's  payments.  The  commis- 
sioners have  been  of  the  opinion  that  the  statute  of  New 
Hampshire  which  governs  local  associations,  limiting  the 
fines  to  a  period  of  six  months  from  the  time  of  the  first 
default,  gives  ample  latitude  in  this  direction ;  and  at  the 
conclusion  of  the  examination  in  1895  they  directed  that 
such  a  change  be  made,  which  the  Association  assented  to 
and  promised  to  carry  out ;  but  the  only  change  that  has 
been  made  has  been  to  limit  the  fines  to  a  six  months 
period  upon  such  shares  as  may  hereafter  be  subscribed  for. 

The  Association  has  also  received  about  $11,000  from 
lapses  which  ceased  about  January,  1891.  No  account  is 
now  lapsed  except  as  the  fines  may  exhaust  the  total  to  a 
member's  credit.     (See  page  9,  Morse.) 

APPORTIONMENT   OF   PROFITS. 

It  has  been  the  practice  of  the  Association  at  semi-annual 
periods  to  apportion  its  entire  profits,  but  not  to  credit  such 
apportionment  to  the  members'  accounts.  The  apportion- 
ment at  any  period  is  used  to  ascertain  the  book  value  of 
the  members'  shares  until  the  next  apportionment,  when 
the  entire  profits  from  the  beginning  are  reapportioned 
among  the  shares  then  in  force.  Up  to  October  24,  1894, 
these  apportionments  were  made  to  shares  of  every  age. 
It  was  then  voted  by  the  directors  that  the  profits  earned 
during  the  first  three  years  of  the  life  of  the  instalment 
shares  and  the  profits  of  the  first  $36  paid  upon  the  fully- 
paid  or  paid-up  shares  should  not  be  apportioned  thereto, 
thus  diverting  these  profits  for  the  benefit  of  the  older 
shares,  so  maturing  certain  of  the  8  per  cent,  half-paid 
stock,  to  which  particular  reference  will  be  made  hereafter. 
(See  pages  10,  et  seq.,  Morse.) 

It  is  claimed  by  the  Association  that  the  authority  for 


13 


thus  depiiving  shares  under  three  years  old  of  the  earnings 
is  contained  in  a  clause  of  the  member's  contract  wherein 
he  agrees  that  in  any  distribution  of  the  profits  or  surplus 
the  principles  and  methods  which  may  be  adopted  by  the 
Association  for  such  distribution  shall  be  ratified  and  ac- 
cepted by  him.  Such  a  distribution  must,  however,  be  a 
legal  one,  for  if  illegal,  no  ratification  of  it  by  the  member 
v^ill  be  binding  upon  him.  It  seems  to  the  commissioners 
the  true  construction  of  this  clause  would  be  that  there  must 
be  an  equitable  and  pro  rata  distribution  of  the  profits  or 
surplus,  as  provided  for  in  the  charter,  among  all  the  mem- 
bers, but  that  the  plan  of  making  this  equal  division  might 
be  determined  by  the  directors  from  time  to  time.  If  such 
a  condition  gives  the  dii'ectors  the  right  to  deprive  certain 
members  of  their  share  of  the  profits  upon  a  division  of  its 
surplus,  such  a  condition  is  certainly  in  conflict  with  its 
charter. 

Whatever  may  have  been  the  right  heretofore  of  this 
Association  to  issue  shares  of  varying  conditions  among  its 
members,  or  to  apportion  its  profits  to  one  member  and  not 
to  another,  it  seems  to  have  obtained  the  right  from  the 
legislature  by  an  act  approved  March  28,  1895,  to  hereafter 
issue  shares  entitled  only  to  such  benefits,  and  to  distribute 
its  surplus  and  profits,  as  it  may  from  time  to  time  deter- 
mine.    We  take  the  liberty  of  citing  this  act  in  full : 

Any  existing  corporation  organized  under  the  laws  of  this  state 
engaged  in  the  business  of  a  building  and  loan  association  under  a 
special  charter,  may  issue  shares  entitled  to  only  such  benefits  and 
distribution  of  surplus  and  profits,  and  with  such  conditions  for  re- 
tiring the  same,  as  may  be  fixed  by  the  Association,  provided  all 
the  conditions  are  plainly  stated  upon  the  certificates  of  such  shares. 

Under  this  law  it  may  deprive  certain  shares  from  any 
distribution  of  the  profits,  providing  the  conditions  are 
plainly  stated  upon  the  certificates.  Who  is  to  judge  what 
is  or  what  is  not  plain  to  the  comprehension  of  the  laboring 
man,  or  to  persons  of  limited  education,  with  whom  such 
Associations  most  largely  deal,  is  not  pointed  out.  Such 
power  given  to  an  Association  of  this  character  is  liable  to 
great  abuse ;  and  the  commissioners  respectfully  urge  that 
Your  Excellency  will  call  the  attention  of  the  next  legisla- 
ture to  this  matter. 

The  plans  adopted  for  the  apportionment  and  reapportion- 


!! 


I 


\ 


14 


ment  of  profits  is  fundamentally  wrong,  and  works  injustice 
to  its  members.  The  statute  of  New  Hampshire  which  gov- 
erns local  building  associations  defines  a  safe  rule  to  follow, 
— that  the  interest,  premiums,  fines,  and  profits  received  by 
the  corporation,  less  losses  and  the  amount  paid  for  the 
necessary  expenses  of  the  business,  shall  be  equitably  dis- 
tributed among  the  shares  and  added  to  the  dues  paid  by 
the  shareholders  at  least  once  a  year.  (Pub.  Sts.,  chap.  166, 
sect.  11.) 

LOSSES. 

There  is  a  condition  in  many  of  the  contracts  with  the 
members  that  losses  may  be  charged  against  dues  paid  in 
by  them.  In  September,  1895  (see  page  14,  Morse),  a  by- 
law was  passed,  and  also  incorporated  in  the  conditions  of 
the  contracts  thereafter  issued,  that  losses  occurring  as  the 
result  of  a  loan  to  a  member  of  a  local  branch  (into  which 
the  Association  had  divided  itself)  shall  be  charged  to  the 
members  of  that  branch  ;  but  previous  to  this  the  losses 
were  charged  pro  rata  against  all  shares  existing  at  the  time 
of  such  loss.  Up  to  July,  1895,  no  losses  had  been  charged 
against  the  members'  accounts,  though  there  had  been 
losses  by  reason  of  certain  contracts  before  mentioned,  pro- 
viding for  a  fixed  withdrawal  value  of  a  larger  sum  than  the 
Association  had  received.  This,  together  with  expenses  not 
provided  for  in  the  contracts,  have  been  from  time  to  time 
deducted  from  the  surplus  at  the  times  of  its  apportionment. 

At  the  joint  examination  of  the  Association  by  the  com- 
missioners of  several  states  in  June  last,  the  claim  was 
made  by  the  Association  that  it  had  the  right  to  charge 
losses  and  expenses  not  provided  for  against  the  capital 
dues,  instead  of  against  the  accumulated  profits.  This  claim 
was  submitted  to  the  attorney  general  of  New  Hampshire 
for  his  opinion,  and  he  decided  that  the  contracts  gave  such 
right.  This  practice  received  much  criticism  from  the  com- 
missioners of  other  states,  who  were  in  some  instances  sup- 
ported by  elaborate  opinions  from  the  law  officers  of  their 
states  and  othei-s  competent  to  pass  upon  the  question. 
They  asserted  that  this  principle,  if  followed,  would  make 
it  possible  for  the  Association  receiving  but  $25,000  in 
profit  accretions  to  lose  $50,000,  and  the  loss  being  charged 
against  the  dues  capital  to  declare  and  pay  out  its  $25,000 
in   dividends,  while  the  business  as  a  whole  would  show  a 


16 


net  loss  of  $25,000, — that  there  could  be  no  surplus  until 
losses  were  deducted  from  the  profits,  and  therefore  no  un- 
distributed profits  where  there  were  outstanding  losses  not 
charged  off ;  that  the  claim  of  the  Association  was  in  op- 
position to  the  well  known  principle  of  law  that  construc- 
tion is  to  be  avoided  which  leads  to  an  absurdity,  and  that  it 
was  repugnant  to  the  universal  practice  applied  to  all  finan- 
cial and  mutual  corporations.  We  understand,  however, 
that  the  opinion  of  tfie  attorney  general  of  New  Hampshire 
was  confined  solely  to  the  question  whether  under  certain 
contracts  with  the  members  these  contracts  gave  the  right 
to  charge  off  losses  against  capital  dues,  which  being  a  plain 
condition  in  the  contract  could  not  well  be  answered  other- 
and  that  the  question  of  whether  such  contracts  were 


wise 


within  the  scope  of  the  authority  of  the  Association  to  exe- 
cute was  not  raised  or  considered. 


4 


EXPENSES. 

Expenses  have  been  provided  for  under  conditions  in  the 
members'  contracts  more  or  less  definite  and  plain  that  the 
expenses  of  the  Association,  exclusive  of  legal  expenses,  may 
equal  but  not  exceed  the  dues  paid  in  by  them  for  the  first 
three  months  and  the  seventh,  eighth,  and  ninth  months  of 
the  first  year  of  the  life  of  their  shares,  and  the  dues  for 
the  first  two  months  of  each  year  thereafter  until  the 
shares  mature. 

The  paid-up  stock  certificates,  with  the  exception  of  about 
$12,000  of  participating  stock,  do  not  seem  to  provide  for 
the  deduction  of  any  portion  for  expenses,  and  it  is  certain 
that  the  Association  would  have  no  right  to  deduct  from 
those  shareholders'  accounts  more  than  the  actual  expense 
incurred. 

The  money  thus  accumulated  has  been  known  as  the 
expense  fund. 

Under  the  conditions  in  the  contracts  for  the  limitation 
of  the  expenses  of  the  Association,  the  question  arises  as  to 
the  right  of  its  officers  to  involve  the  members  in  any  other 
regular  and  foreseen  expenses,  such  as  the  payment  of  com- 
missions for  the  sale  or  placing  of  first  mortgages,  which 
have  been  paid  by  it  to  its  agents  at  a  rate  varying  from  3 
per  cent,  to  5  per  cent,  on  the  face  of  the  mortgages,  and 
have  amounted  to  the  sum  of  $55,161.56,  and  taxes  and 
licenses  paid  for  doing  business  in  other  states,  or  expenses 


f 


16 


17 


not  strictly  in  their  nature  legal  expenses  of  the  corporation 
itself;  and  if  such  right  did  not  exist,  whether  the  losses  so 
occasioned  should  be  made  up  from  the  $100,000  guaranty 
fund  or  from  some  other  source. 

AGENCY  COMPANY. 

On  the  3d  of  October,  1891,  a  contract  was  made  with 
a  corporation  organized  under  the  laws  of  this  state  known 
as  the  Guaranty  Agency  Company,  with  a  capital  of  $20,- 
000,  by  which  contract  it  was  employed  by  the  Association 
to  solicit  business  for  it,  to  establish  and  organize  for  it  local 
agencies,  solicitors,  and  representatives,  and  to  perform  such 
other  reasonable  services  for  the  promotion  of  the  business 
as  might  from  time  to  time  be  required.  For  this  service  the 
contract  provided  that  the  Agency  Company  should  receive 
all  the  dues  paid  on  account  of  each  share  in  the  Asso- 
ciation during  the  first  three  and  the  seventh,  eighth,  and 
ninth  months  of  the  life  of  each  share,  and  $2  per  share  for 
the  fiist  two  months  of  each  year  thereafter,  and  an  amount 
equal  to  16§  per  cent,  upon  shares  wholly  or  partially  paid 
up  in  cash,  except  that  upon  the  so-called  eight-year  shares 
the  entire  payments  should  not  exceed  $18  per  share.  The 
Agency  Company  agreed  to  pay  all  the  expenses  of  the  As- 
sociation in  the  management  of  its  business,  including  ad- 
vertising, printing,  and  the  amount  paid  to  agents,  solicitors, 
and  representatives  by  way  of  commissions,  excepting  the 
legal  expenses  and  commissions  for  the  sale  of  securities, 
which  were  to  be  paid  by  the  Association. 

This  contract  further  provided  that  all  agreements  and 
contracts  which  the  Agency  Company  should  solicit  or  pro- 
cure to  be  made  with  other  agents,  solicitors,  and  represen- 
tatives, should  be  executed  by  the  Association,  and  the  con- 
tract was  to  continue  in  force  for  a  period  of  fifty  years, 
except  that  it  might  be  terminated  at  the  option  of  the 
Association  if  in  any  one  year  the  Association  should  not 
receive  applications  for  at  least  one  million  dollars  of  new 
shares  reckoned  at  par  value. 

The  stockholders  of  the  Agency  Company  consisted  of 
G.  Percival  Stewart,  and  four  others  who  were  nominal  share- 
holders. A  question  arises  whether  the  officers  of  the  Asso- 
ciation in  making  this  contract  were  not  dealing  with  them- 
selves, and  whether  it  is  within  the  power  of  the  Association 
under  its  charter,  to  make  a  contract  with  a  third  party 


whereby  a  fixed  portion  of  its  income  is  taken  and  an  un- 
certain and  perhaps  unnecessary  amount  of  profits  diverted 
from  its  members.  And,  further,  whether  it  is  within  its 
power  to  absorb  under  any  guise  to  the  extreme  limit  the 
sums  which  the  contracts  permit  to  be  taken,  unless  they 
are  absolutely  needed  for  expenses.  Under  the  charter, 
any  excess  of  the  expense  fund  over  the  actual  legitimate 
disbursements  of  the  Association  belong  to  the  members. 

Under  this  contract  with  the  Guaranty  Agency  Company 
it  has  been  the  practice  for  the  officers  of  the  Association  in 
the  regular  course  of  business  to  receive  all  money  paid  in  on 
account  of  the  expense  fund ;  pay  the  salaries  and  running 
expenses  provided  for  in  the  contract  except  a  small  amount 
disbursed  by  its  treasurer ;  and  from  time  to  time  turn  over 
to  the  treasurer  of  the  Agency  Company  the  balance  re- 
maining, which  between  November  30,  1891,  and  May  18, 
1895,  amounted  to  $67,456.33.  The  regular  salaries  paid 
by  the  Agency  Company  to  the  officers  of  the  Association 
amount  to  $14,200  per  annum.  The  average  weekly  pay 
roll  for  clerk  hire  at  this  time  is  about  $250. 

The  Association    under  the    provisions  of   the   contract 
with  the  Agency  Company  has   executed   contracts  with 
some  twelve  or  more  general  agents  in  different  parts  of 
the  country,  who  have  general  charge  of  the  business  of 
obtaining  members  and  negotiating  loans  in  their  respect- 
tive  sections.     Under  them  were  appointed  sub-agents,  and 
numerous  local  agents,  who  are  all  paid  by  the  general  agents. 
These  contracts  do  not  materially  vary.     The  contract  with 
Messrs.  Scarborough  &  Hicks,  general  agents  for  New  Hamp- 
shire and  Vermont,  provided  that  they  should  receive  80  per 
cent,  of  the  first  and  second  months'  dues  actually  collected 
and  paid  in  or  deposited  upon  shares  secured  in  their  terri- 
tory, excepting  such  shares  as  might  personally  be  sold  by 
officers  of  the  Association  with  their  consent.    For  the  next 
tenth  month's  dues,  20  per  cent.    On  the  monthly  dues  there- 
after, 5  per  cent.     For  all  fully  paid  shares  sold  by  them, 
7i  per  cent.  flat.     And  in  addition  2  per  cent,  upon  all  col- 
lections.    In  this  contract  there  is  a  cash  bonus  promised  of 
$1,000  as  soon  as  in  any  one  month  the  shares  sold  in  their 
territory  amount  to  $5,000  ;  an  additional  bonus  of  $1,000 
when  they  shall  amount  to  $10,000,  and  another  bonus  of 
$1,000  as  soon  as  they  shall  amount  to  $15,000,  the  bonus  be- 
ing offered  to  stimulate  and  encourage  the  agents  in  procur- 
2 


!   «v 


i     #» 


18 

ing  a  large  amount  of  new  business.  (See  page  29,  Morse.) 
All  the  contracts  with  general  agents  examined  are  perpetual. 
In  case  of  the  agent's  death  or  the  discontinuance  of  his 
agency,  all  commissions  and  renewals  due  under  his  con- 
tract, so  long  as  the  shares  are  in  force  and  the  dues  paid, 
are  to  be  paid  to  his  heirs. 

A  contract  with  Mr.  E.  E.  Burlingame,  general  agent  for 
New  York,  provided  for  a  commission  upon  the  first  three 
months'  dues  of  100  per  cent,  for  the  first  three  years  of  his 
contract,— after  that  time,  80  per  cent.  On  the  next  three 
months'  dues  no  commissions  are  paid.  On  the  seventh 
month's  dues,  60  per  cent.  On  the  eighth  month's  dues, 
70  per  cent.  On  the  ninth  month's  dues,  45  per  cent.  On 
each  of  the  first  two  months'  dues  of  each  and  every  year 
after  the  first  year  of  the  life  of  the  share,  76  per  cent.  On 
participating  fully-paid  shares,  7i  per  cent. 

It  has  been  generally  believed  that  these  contracts  with 
the  general  agents  have  been  very  profitable  to  them.  A 
contract  made  with  Mr.  F.  A.  Palmer  on  May  14,  1892, 
was  recently  cancelled  by  the  Association,  and  he  was  paid 
$10,000  as  the  value  of  the  future  commissions  upon  the  busi- 
ness already  secured  by  him.  The  agents  whom  the  com- 
missioners have  been  able  to  examine,  notably  Mr.  H.  (t. 
Scarborough,  Mr.  Burlingame,  and  Mr.  P.  B.  Nettleton 
whose  contract  covers  the  state  of  New  Jersey,  testify 
that  the  profits  of  the  business  to  themselves  have  not 
been  excessive,  large  sums  having  been  paid  by  them  for 
salaries  and  commissions  to  their  sub-agents.  It  appears 
from  the  books  of  the  Association,  however,  that  enor- 
mous sums  have  been  paid  for  commissions.  In  the  year 
1895,  138,094.21  was  paid  to  E.  E.  Burlingame,  f26,487.8b 
to  F.  A.  Palmer,  and  $19,076.15  to  Scarborough  &  Hicks, 
as  commissions  on  new  business,  and  to  other  agents  large 
sums;  and  in  addition  to  this,  155,161.56  has  been  paid  to 
agents  as  commissions  for  negotiating  first  mortgages. 

On  the  27th  of  May,  1895,  the  arrangement  with  the 
Guaranty  Agency  Company  was  discontinued  upon  pay- 
ment by  the  Association  to  it  of  1,000  shares  of  common 
stock,  of  the  par  value  of  $100,  of  the  Permanent  Guaranty 
Shareholders'  Fund,  leaving,  however,  the  contracts  exe- 
cuted by  the  Association  with  the  general  agents  still  in 
force,  and  the  rates  of  commission  therein  provided,  obliga- 
tory upon  the  Association  to  pay.    A  question  arises  whether 


19 


such  contracts  were  legal  and  within  the  scope  of  the  author- 
ity of  the  Association  to  execute,  and  whether  the  future 
perpetual  commissions  should  not  be  assumed  and  paid  by 
the  Agency  Company. 

The  evidence  derived  from  the  contracts  of  the  Associa- 
tion with  the  Guaranty  Agency  Company,  and  with  its 
general  agents,  votes  passed  by  the  directors  and  amend- 
ments of  its  by-laws,  together  with  other  facts  which  have 
come  to  the  knowledge  of  the  commissioners,  point  to  the 
conclusion  that,  whether  or  not  it  was  necessary,  in  order 
to  carry  out  the  scheme  of  the  Association,  that  it  should 
obtain  a  continued  increase  of  membership,  it  at  least  dem- 
onstrates that  they  were  desirous  of  so  doing.  A  provision 
in  the  contract  with  the  Agency  Company,  that  at  least  one 
million  dollars  of  new  shares  should  be  obtained  each  year, 
with  like  provisions  in  the  contracts  with  the  general 
agents — in  that  of  Mr.  Burlingame  that  he  should  furnish 
10,000  new  shares  each  year  ;  Mr.  Nettleton,  2,000  applica- 
tions ;  Mr.  Woodruff,  whose  territory  covers  the  state  of 
Texas,  2,000  new  shares  ;  Mr.  Crum,  whose  territoiy  covers 
the  state  of  Colorado,  1,000  applications — and  so  on  in  les- 
ser amounts  among  the  other  general  agents,  with  the 
incentive  of  large  commissions,  and  the  suspension  of  a  by- 
law designed  for  the  protection  of  the  Association  against 
borrowers,  to  the  effect  that  payments  upon  shares  must  be 
made  for  six  months  previous  to  obtaining  a  loan,  prove  this 
assertion,  although  Mr.  G.  P.  Stewart,  the  former  president 
of  the  Company,  asserts  that  if  the  funds  of  the  members 
already  secured  can  be  loaned,  the  shares  can  be  matured  as 
rapidly  without  any  new  members  being  obtained. 

It  appears,  from  the  testimony  of  such  general  agents  as 
the  commissioners  were  able  to  secure,  that  upon  being 
questioned  in  regard  to  the  terms  and  conditions  of  the  con- 
tracts made,  they  were  unable  to  clearly  or  accurately 
define  them,  and  a  strong  suspicion  is  forced  upon  the  commis- 
sioners that  agents  do  not  accurately  or  sufficiently  explain 
to  subscribers  the  conditions  upon  which  shares  are  taken. 
(See  page  13,  H.  G.  Scarborough;  page  23,  E.  E.  Burlin- 
game ;  page  6,  F.  B.  Nettleton.) 

An  example  of  this  appears  in  inquiries  made  of  several 
general  agents  in  regard  to  the  amount  a  member  was  enti- 
tled to  withdraw,  under  the  conditions  of  the  contracts 
made  by  the  Association  since  October,  1894.     Section  12 


20 

of  the  conditions  of  these  contracts,  provides  that  10  per 
cent,  of  the  net  earnings  of  the  loan  fund  shall  be  carried  to 
the  guarantee  fund  of  the  Association,  until  such  fund  shall 
equal  10  per  cent,  of  the  liability  of  the  Association  to  its 
members  ;  also,  that  no  dividends  shall  be  allowed  for  the  first 
three  years.  Section  13  provides  that,  whenever  the  board  of 
directors  find  that  the  funds  of  the  Association  are  not  de- 
manded by  borrowers  offering  safe  and  profitable  investments, 
they  may  offer  investing  shareholders  as  an  inducement  to 
withdraw,  all  money  paid  in  by  them,  with  the  net  profits 
thereon,  less  expenses  to  date.  If  this  offer  fails  to  reduce  the 
income,  or  investment  fund,  then  the  directors  may  call  in  or 
redeem,  upon  the  same  terms,  the  requisite  number  of  shares. 
Upon  being  asked  to  state  how  much  money  would  be  paid 
to  a  member  whose  shares  were  36  months  old,  upon  their 
being  called  in,  the  agents  were  unable  to  state,  or  an- 
swered incorrectly.  An  examination  of  the  contract  shows 
that  a  member  having  made  36  payments,  the  expenses 
would  amount  to  $10,  with  a  possible  addition  of  a  further 
sum  for  legal  expenses,  as  provided  for  in  section  14 ;  but, 
as  no  dividends  were  to  be  allowed  the  members  for  the 
first  three  years,  there  were  no  profits  to  offset  the  deduc- 
tion of  the  expenses,  and  the  member  could  be  forced  out 
without  receiving  the  slightest  benefit  or  return  for  his 
monev,  by  paying  him  only  $26  of  the  136  contributed  by 
him.  "  If  these  conditions  were  not  clearly  understood  by 
the    agents,  they   certainly   were  not   understood   by  the 

investor.  •       u  4.  + 

The  commissioners  have  been  able  to  examine,  but  to  a 
limited  extent,  the  literature  disseminated  by  the  Associa- 
tion and  made  use  of  by  the  agents  in  securing  new  mem- 
bers. In  a  pamphlet  containing  the  advertisements  and 
prospectus  of  the  Company,  an  illustration  of  the  profit  to 
an  investor  taking  10  shares  is  given  as  follows : 

Value  of  stock  at  maturity       ....        $2,000 

Monthly  dues,  $1  per  share, 

Ten  dollars  per  month  for  96  months       .         •  ^^^ 

Making  a  profit  of $1,040 

Note.  Whatever  time  the  stock  matures  less  than  estimated, 
profits  will  be  proportionately  larger. 

While  there  is  no  distinct  promise  that  the  Association 


21 


will  mature  its  shares  in  eight  years,  the  investor  is  led  to 
infer  that  it  can  do  so,  or  even  better. 

It  is  clear  that  the  methods  of  the  Association,  as  above 
referred  to,  have  placed  the  management  of  its  affairs 
entirely  in  the  hands  of  persons  who  benefit  from  the  com- 
missions received  for  new  members,  regardless  of  whether 
they  are  persons  likely  to  continue  their  payments  for  more 
than  the  first  two  or  three  months,  or  to  be  of  any  substan- 
tial benefit  to  the  Association,  and  from  the  commissions 
for  placing  mortgages,  regardless  of  whether  the  property  is 
a  suflScient  security  for  the  loan.  In  instances  widely  sepa- 
rate, in  New  York,  Texas,  and  Colorado,  it  appears  that 
extreme  recklessness  has  been  practised  in  loaning  money 
to  persons  who  were  deeply  in  debt,  or  upon  property 
having  fictitious  values,  thus  throwing  a  suspicion  upon  the 
character  of  all  its  mortgage  security. 

When  the  contract  with  the  Guaranty  Agency  Company 
was  cancelled,  an  earnest  effort  was  made  by  Mr.  Stewart 
to  stimulate  and  enlarge  the  growth  of  the  Association  by 
providing  for  a  guaranty  fund.  A  meeting  was  called,  and 
the  by-laws  amended  to  provide  for  a  permanent  guaranty 
shareholders'  fund,  not  exceeding  f  200,000 ;  1100,000  of 
preferred  shares  were  to  be  issued  for  cash,  and  $100,000  of 
common  shares  issued  for  the  purpose  of  paying  for  the 
Guaranty  Agency  Company's  contract. 

At  that  meeting  the  following  preamble  and  resolution 
were  adopted : 

Whereas,  The  unlooked-for  growth  of  the  business  of  the  Asso- 
ciation has  produced  results  requiring  changes  and  modifications  of 
the  contract  of  October  3,  1891,  between  the  Association  and  its 
general  agent,  and  the  further  growth  of  the  Association  may  be 
impeded  by  the  existence  of  a  valid  contract  placing  its  entire  busi- 
ness in  the  charge  of  a  single  agent,  and  contention  having  arisen 
as  to  the  amounts  now  due  the  agent  under  this  contract,  and  it  is 
therefore  deemed  desirable  to  acquire  the  rights  of  such  agent  for 
the  sole  benefit  of  the  Association,  and 

Whereas,  By  said  contract  it  was  provided  tliat  in  the  event  of 
a  discontinuance  of  the  Agency  the  agents  should  continue  to  re- 
ceive all  commissions  and  renewals  on  business  written  while  the 
contract  should  be  in  force,  and  the  present  value  of  the  agent's 
rights  to  the  commissions  and  renewals  amount  to  a  very  large  sum, 
estimated  at  more  than  one  hundred  thousand  dollars,  and  is  con- 
stantly increasing,  and 

Whereas,  The  agent  has  consented  to  surrender  said  contract 


22 

and  all  its  rights  thereunder,  together  mth  all  claims  against  the 
Association,  and  accept  in  payment  therefor  $100,000  in  the  com- 
mon shares  of  the  Permanent  Guaranty  Shareholders'  Fund,  this 
day  established  by  the  by-laws  : 

Resolved,  That  the  Association  will  purchase  all  the  rights  of  the 
Guaranty  Agency  Company,  under  said  contract,  together  with  all 
its  claims  against  the  Association,  and  in  full  payment  therefor  will 
issue  to  such  agent,  or  its  stockholders,  common  shares  in  the  Per- 
manent Guaranty  Shareholders'  Fund  to  the  amount  of  $100,000, 
the  certificates  of  such  common  shares  to  contain  the  following  con- 
ditions: (See  certificate  marked  Q.) 

The  1100,000  preferred  stock  was  to  be  maintained  as  a 
guaranty  fund  for  the  payment  of  all  the  legal  liabilities  of 
the  Association,  though  its  availability  for  this  purpose  was 
limited  to  the  case  of  an  insufficiency  of  assets  upon  a  gene- 
ral distribution  of  the  property  of  the  Association  among 
its  members.  This  stock  was  to  be  invested  with  the  other 
capital  of  the  Association,  and  was  to  participate  in  the 
earnings,  and  upon  which  there  was  to  be  a  dividend  not 
exceeding  8  per  cent,  per  annum.  The  earnings  of  this 
preferred  stock,  together  with  all  moneys  received  by  the 
Association  from  the  expense  fund  before  described,  which 
was  formerly  taken  by  the  Guaranty  Agency  Company, 
were  to  be  credited  to  this  guaranty  fund.  Out  of  said 
fund,  the  entire  expenses  of  the  Association  were  to  be  paid, 
with  certain  limitations  as  to  the  amount,  from  the  balance 
the  8  per  cent,  dividend  was  to  be  paid,  and  the  remainder 
then  paid  to  the  common  shareholders.  Mr.  G.  P.  Stewart 
at  once  presented  a  subscription  for  the  entire  preferred 
stock  of  this  fund,  which  was  accepted.  In  order  to  make 
payment  of  this  fund,  he  gave  his  promissory  note  to  the 
As^sociation  for  140.000,  payable  upon  demand,  at  6  per  cent, 
interest,  with  half-paid  8  per  cent,  stock  of  the  Association  as 
security.  He  surrendered  $14,814  of  mortgages,  which  he  had 
purchased  from  the  Association,  and  which  it  has  been  repre- 
sented the  Association  was  liable  to  pay  under  its  guarantee. 
He  also  surrendered  $15,252  of  trustee  stock,  above  de- 
scribed, making  in  all  the  sum  of  170,066  obtained  from  the 
Association.  These  transactions  received  much  adverse 
criticism  from  the  commissioners  of  various  states  at  the 
general  examination  made  by  them  in  the  summer  of  1895 ; 
and  it  appearing  to  this  board  that  the  advertised  guarantee 
for  the  payment  of  the  liabilities  of  the  Association  was 


28 


misleading  and  elusive,  they  directed,  and  it  was  promised, 
that  this  guaranty  fund  should  be  withdrawn,  Mr.  Stewart 
agreeing  to  obtain  releases  from  all  members  of  the  Asso- 
ciation who  had  subscribed  for  shares  since  its  creation. 
No  such  releases  have  been  presented  to  the  commissioners, 
and  the  $100,000  still  remains  as  a  part  of  the  assets,  though 
its  feature  as  a  guaranty  fund  for  the  payment  of  the  legal 
liabilities  of  the  Association  has  been  eliminated,  by  vote  of 
the  directors. 

On  the  3d  of  October,  1895,  Mr.  Stewart  withdrew  from 
the  Association  $50,000  upon  his  250  shares  of  8  per  cent, 
stock,  as  shown  hereafter,  which  was  cancelled,  and  took  up 
his  note  of  $40,000,  paying  in  addition  to  the  interest  a 
bonus  or  premium  of  6  per  cent. 

The  substitute  for  the  Guaranty  Agency  Company,  which 
took  the  form  of  the  Permanent  Shareholders'  Fund  of 
$200,000,  still  exists,  and  so  far  as  the  diversion  of  the  funds 
belonging  to  the  members,  and  the  absorption  of  any  surplus 
over  meeting  the  actual  expenses  of  the  Association,  applies 
to  this  with  the  same  force  that  it  applied  to  the  Agency 
Company. 

It  appears  that  the  common  stock  of  this  fund  is  divided 
between  two  of  the  principal  officers  of  the  Association,  Mr. 
G.  Percival  Stewart  owning  750  shares,  and  Mr.  Philip  Car- 
penter, the  general  counsel  of  the  Association,  the  remaining, 
250  shares ;  and  that  Mr.  Stewart  is  the  owner  of  971  shares 
of  the  preferred  stock  of  the  $100,000,  upon  which  8  percent, 
is  paid  annually.  There  has  been  credited  to  this  Perma- 
nent Shareholders'  Fund,  as  appears  by  the  books  of  the 
Association,  the  sum  of  $10,933.33,  from  May  18,  1895,  to 
January  17,  1896,  which  was  derived  from  that  portion  of 
the  dues  set  aside  for  expenses. 


G.   PERCIVAL   STEWART. 

Reference  has  been  made  to  the  maturing  of  certain  shares 
under  the  system  of  apportioning  profits  adopted  by  the  As- 
sociation in  October,  1894. 

On  December  5,  1889,  a  certificate  for  250  shares  in  the 
building  and  loan  fund  class,  July,  series  1889,  was  issued 
to  Mr.  Stewart.  This  is  the  8  per  cent.,  half-paid  stock 
described  above.  The  ledger  of  members'  accounts,  num- 
bered 1  to  2,500,  shows  the  transaction  as  follows : 


24 


I 


Account  No.   1,050,    G.   Percival  Stewart,   Manchester,   N.    H. 

Half-paid. 

1889.                         Dr.  Cr.                             Total. 

July.                    $4,166.67.  $25,000.                $20,833.33. 

It  was  explained  that  Mr.  Stewart  deducted  from  the 
price  of  the  shares  the  commissions  and  amount  that  would 
go  to  the  expense  fund,  which  at  that  time  belonged  to  him 
under  a  contract  with  the  Association  similar  to  the  contract 
with  the  Guaranty  Agency  Company,  leaving  the  sum  of 
120,833.33  net  to  the  Association. 

At  some  time  the  word  "  July  "  in  the  certificate  was  altered 
to  the  word  "  Jan'y,"  thereby  making  these  shares  six  months 
older  than  it  first  appeared  by  the  certificate  or  by  the  ledger. 

In  January,  1893,  this  certificate  was  broken  up  into  a 
number  of  certificates  of  smaller  denomination,  and  upon  a 
new  ledger  the  transaction  was  placed  under  date  of  Janu- 
ary 1,  1889.  It  will  be  seen  by  a  following  statement  that 
these  shares  would  not  have  matured  in  July,  1895,  if  they 
had  commenced  at  the  date  of  the  issue  of  the  certificate, 
December  5,  1889,  nor  if  they  had  began  July  1,  1889.  On 
this  stock  he  regularly  received  8  per  cent,  interest  upon 
$25,000  for  six  and  one  half  years,  ending  July  1,  1895. 
The  method  of  apportioning  profits  adopted  in  October, 
1894,  was  modified  in  January,  1895,  to  the  effect  that  prof- 
its earned  from  the  first  three  years  of  the  life  of  install- 
ment shares  were  not  to  be  apportioned  thereto,  nor  should 
fully-paid  or  paid-up  shares  share  beyond  the  dividend 
guaranteed,  except  upon  a  corresponding  basis.  On  July 
8,  1895,  an  apportionment  of  the  surplus  of  the  Association 
was  directed  to  be  made  by  the  secretary  as  of  July  1, 1895, 
under  the  above  method  adopted  by  the  directors.  In  mak- 
ing this  apportionment  the  book  surplus  of  the  Association 
at  that  date  was  taken.  This  surplus  had  been  increased  in 
1894  by  the  sum  of  $5,411.50,  previously  credited  to  a  guar- 
anty fund,  for  the  reason  that  it  had  originally  been  taken 
from  lapsed  accounts,  making  the  sum  of  $200,742.16.  To 
this  was  added  an  item  of  $23,000,  being  about  50  per  cent, 
of  the  amount  of  discounts  on  mortgages  sold.  This  sum 
was  derived  from  the  theory  that  sums  paid  as  commissions 
for  placing  first  mortgages  which  were  to  run  for  a  term  of 
years  should  not  all  be  charged  off  at  the  time  of  payment. 
The  diversion  of  this  surplus  excluded  installment  shares  un- 
der three  years  of  age,  and  paid-up  shares  upon  a  correspond- 


25 


ing  basis  of  eighteen  months,  maturing  the  8  per  cent,  stock 
held  by  Mr.  Stewart,  and  ten  shares  held  by  other  individuals, 
which  have  not  been  paid.  The  following  statement  shows 
the  manner  of  the  apportionment  of  Mr.  Stewart's  shares ; 

Cr. 

Amount  of  net  capital  paid  in   .         .         .         .         .     $20,833.33 
Interest  on  capital  for  five  years  (dividend  being  de- 
ferred  1^    years)    at   29    per   cent.,   compounded 
monthly         ........       66,436.44 


Dr. 

Cash  dividends  paid         .... 

Interest  on  $1,000  at  29  per  cent.,  com- 
pounded monthly  for  72  months   . 

Interest  on  $1,000  at  29  per  cent.,  com- 
pounded monthly  for  66  months   . 

Interest  on  $1,000  at  29  per  cent.,  com- 
pounded monthly  for  60  months    . 

Interest  on  $1,000  at  29  per  cent.,  com- 
pounded monthly  for  54  months    . 

Interest  on  $1,000  at  29  per  cent.,  com- 
pounded monthly  for  48  months    . 

Interest  on  $1,000  at  29  per  cent.,  com- 
pounded monthly  for  42  months    . 

Interest  on  $1,000  at  29  ])er  cent.,  com- 
pounded monthly  for  36  months   . 

Interest  on  $1,000  at  29  per  cent.,  com- 
pounded monthly  for  30  months    . 

Interest  on  $1,000  at  29  per  cent.,  com- 
pounded monthly  for  24  months   . 

Interest  on  $1,000  at  29  per  cent.,  com- 
pounded monthly  for  18  months    . 

Interest  on  $1,000  at  29  per  cent.,  com- 
pounded monthly  for  12  months    . 

Interest  on  $1,000  at  29  per  cent.,  com- 
pounded monthly  for  6  months     . 


Less  percentage  of  losses  paid    . 


Less  capital  paid  in  . 

Apportioned  profits  withdrawn  . 
Cash  dividends  withdrawn  as  above 


$87,269.77 

$13,000.00 

4,579.96 

3,834.19 

3,188.96 

2,629.85 

2,145.37 

1,725.58 

1,361.81 

1,046.58 

773.41 

536.78 

331.72 

154.01 

$35,308.22 

•                 • 

$51,961.55 
3,710.05 

•                 • 

$48,251.50 
20,833.33 

•                 • 

$27,418.17 
$13,000.00 

> 


26 


27 


After  the  examination  by  the  commissioners  in  June, 
1895,  certain  losses  were  charged  off  by  the  Association,  a 
proportionate  part  of  which  was  charged  to  Stewart's  shares. 
If  these  losses  were  to  be  deducted  at  the  time  of  the  appor- 
tionment, it  will  be  seen  by  the  above  statement  that  the 
shares  do  not  mature  to  the  par  value  of  $50,000 ;  but,  not- 
withstanding this,  on  October  3,  1895,  Mr.  Stewart  with- 
drew $48,251.50. 

It  appears  by  the  testimony  of  the  secretary  (see  page 
47,  Morse)  that  if  the  apportionment  of  the  surplus  had 
been  made  upon  all  the  shares  in  force  June,  1895,  that  this 
half-paid  8  per  cent,  stock  would  not  have  been  matured. 
No  other  shares  but  those  belonging  to  the  then  president, 
Mr.  G.  P.  Stewart,  were  withdrawn  under  this  apportion- 
ment. On  October  28, 1895,  the  method  of  apportioning  the 
profits  was  again  changed,  so  that  a  distribution  should  be 
had  to  all  the  shares  of  the  members  from  the  date  of  their 

issue. 

Mr.  Stewart  and  Mr.  Morse,  the  secretary,  in  their  testi- 
mony before   the  bank  commissioners   February  4,  1896, 
gave  as  the  reason  for  and  in  justification  of  the  apportion- 
ment of  the  profits  derived  from   shares  under  three  years 
old  to  those  above  that  age  that  the  deposits  made  in  sev- 
eral states,  to  enable  the  Association  to  do  business  there, 
which  deposits  amount  to  $200,000,  inflict  a  burden  upon 
the  older  shareholders  from  whose  funds  these  deposits  were 
derived,  because  this  money  produced  but  4i  per  cent,  in- 
terest, while  the  other  funds  of  the  Association  were  pro- 
ducing a  much  larger  rate.     The  insufficiency  of  this  reason 
is  apparent  when  it  is  considered,  in  the  first  instance,  that 
the  deposits  were  made  for  the  sole  purpose  of  obtaining 
the  right  to  do  business  in  these  states,  and  that  the  differ- 
ence in  the  rate  of  earnings  was  off-set  by  the  profits  from 
the  increased  business  obtained.     (See  page  8,  Stewart.) 
Further,  the  securities  deposited  in  Maine,  amounting  to 
$67,987.90,  in  Vermont  amounting  to  $2,100,  and  in  New 
Jersey  amounting  to  $30,000,  were  made  for  the  security  of 
the  shareholders  in  those  states  respectively  ;  and   in  the 
case  of  the  Maine  deposit  it  was  given  as  a  reason  for  ex- 
tending the  estimated  maturity  of  the  shares  from  8  to  10 
years,  so  that  any  loss  of  earnings  because  of  these  deposits 
should  have  been  borne  by  those  members  for  whose  bene- 
fit they  were  made.     A  deposit  of  $100,000  was  made  in 


\ 


New  York,  but  whether  this  was  solely  for  the  benefit  of 
the  members  who  were  citizens  of  that  state,  or  for  the 
benefit  of  all  shareholders  of  the  Association,  is  disputed. 
But,  waiving  these  suggestions,  it  appears  that  by  the  ap- 
portionment of  profits  under  which  this  stock  was  matured, 
$503,899  was  the  amount  of  capital  diverted,  or  to  which 
no  profits  were  apportioned.  If  this  money  was  paid  in  in 
regular  amounts  each  month  for  the  three  years  time,  the 
Association  would  have  had  the  use  of  the  $503,899  for  a 
period  of  9  months.  The  state  deposits  of  $200,000  had 
been  made  for  two  years.  If  any  arbitrary  percentage  of 
earnings  is  adopted, — for  instance  20  per  cent.,  which  was 
the  amount  of  the  earnings  as  shown  by  their  books  at  the 
last  previous  apportionment  of  the  profits  upon  all  the 
shares  as  testified  to  by  the  secretary,  Mr.  Morse, — and  if 
this  $200,000  earned  but  4i  per  cent.,  the  loss  to  the  Asso- 
ciation in  profits  on  this  deposit  would  be  15^  per  cent,  per 
annum,  or,  for  the  two  years,  $62,000.  The  earnings,  how- 
ever, of  the  $503,899  for  9  months  at  the  same  rate  of  in- 
terest would  be  $75,584,  or  a  gain  to  the  shareholders  over 
three  years  of  age  of  $13,584,  by  reason  of  this  method  of 
apportionment. 

At  a  meeting  of  the  directors  held  on  January  17,  1896, 
the  president  was  directed  to  employ  a  certain  building  and 
loan  expert  to  make  an  examination  of  its  business  and  to 
report,  among  other  things,  *'  whether  the  methods  hereto- 
fore adopted,  of  apportioning  the  profits  to  the  various 
classes  of  shareholders  are  fair  and  equitable  for  all  mem- 
bers and  should  be  continued,  and  in  what  respects,  if  any, 
the  same  should  be  modified."  In  reply,  the  expert  wrote  : 
"  I  am  firmly  of  the  opinion  that  the  division  of  profits 
should  not  be  based  on  deferring  dividends  on  any  class  of 
stock."  From  this  state  of  facts  the  question  arises  whether 
the  half-paid  8  per  cent,  stock  was  lawfully  matured,  and 
whether  Mr.  G.  P.  Stewart  had  the  right  to  withdraw  the 
par  value  of  his  shares  in  cash. 

The  following  is  a  financial  statement  as  appears  by  the 
books  of  the  Association  January  7,  1896: 


\ 


28 


GRANITE  STATE   PROVIDENT  ASSOCIATION. 

Statement  of  assets  and  liabilities,  as  shown  by  the  books  of  the 
Association,  January  7,  1896 : 


Assets. 

Mortgage  loans         .... 

Deposits  with  states : 

Vermont       ..... 
Maine  ..... 

New  York 

New  Jersey  .... 

Loans  on  shares       .... 
Notes  receivable      .... 
Guaranty  fund         .... 
Accounts  receivable 
Real  estate,  acquired  by  foreclosure 
Office  fixtures  .... 

Accrued  interest  and  premium 
Cash  on  hand,  and  in  banks 


$2,100.00 

67,987.90 

100,000.00 

30,000.00 


LIABILITIES. 


Installment  shares 

Advance  fund         .... 

Paid-up  stock,        .... 

Permanent  shareholders'  fund 

First  mortgages  sold,  and  assumed 

Due  on  uncompleted  loans 

Due  permanent  shareholders'  fund 


Surplus  as  per  Association  books : 


$806,837.94 

28,354.35 

488,781.51 

100,000.00 

1,391,654.67 

8,719.29 

7,932.61 


Apportioned 
Undivided  . 
Guaranty  fund 


$157,215.04 
44,295.70 
28,765.53 


$2,530,140.64 


$200,087.90 
14,066.00 
12,190.40 

6,500.00 
66,598.30 
99,897.09 

6,274.06 
68,339.98 
58,462.27 

$3,062,556.64 


$2,832,280.37 


$230,276.27 
$3,062,556.64 


29 


ANALYSIS    OF    FINANCIAL    STATEMENT.— MORTGAGE     LOANS, 

$2,530,140.64. 


Real  estate  mortgages  in  possession  of  Association  . 
Of  this  $77,576.32  represent  first  mortgages  sold 

but   not   redeemed   by   the   Association    and   their 

equities. 

Equities  on  real  estate  in  possession  of  the  Associa- 
tion, with  "  first  mortgages  sold  "... 

First  mortgages  sold,  and  in  hands  of  others     . 
Of  the  above  mortgages  $114,450  are  on  demand, 

$53,580  are  over  due,  and  $155,885  will  become  due 

during  the  remainder  of  the  year  1896. 

First  mortgage,  included  in   New  York   state   de- 
posit, erroneously  included  in  this  item 


$741,279.82 


419,956.15 
1,361,604.67 


8,000.00 
$2,530,140.64 


DEPOSITS  WITH  STATES,  $200,087.90. 


Vermont : 

First     mortgages,    deposited    with 
banking  department    . 
Maine — Deposit  with  state  treasurer  : 

Stock,  Cocheco  National  Bank,  Do- 
ver, N.  H.,  par  value  . 

Stock,  Traders'  National  Bank,  Low- 
ell, Mass.,  par  value    . 

Bonds,   Maine  Central  &  E.  &  N. 
R'y.,  4s,  1933     .... 

Bonds,    Concord    &    Montreal,   4s, 
1920 

Bonds,    Maine    Central    R'y,   4^s, 

lyzu  ...•.• 

Interest  coupons  on  last  item  . 
Certificate    of    deposit,  Merchants' 
National  Bank,  Manchester 
Certificate   of   deposit,    Franklin   Na- 
tional Bank,  New  York 
Certificate  of  deposit,  Portland  Trust 
Company    ..... 
Certificate  of  deposit,  Portland  Trust 
Company    .         .         .         .         . 


$1,100.00 

4,000.00 

10,000.00 

10,000.00 

10,000.00 
200.00 

10,000.00 

10,232.60 

6,399.00 

6,056.30 


$2,100.00 


$67,987.90 
$70,087.90 


/ 


/ 


30 


Brought  forward. 

This  deposit  is  made  under  the  re- 
quirements of  the  Public  Laws  of 
Maine,  1891,  chap.  79,  sec.  2,  which 
provides  that  an  association  shall  not 
transact  business  in  the  state  unless  it 
shall  first  deposit  with  the  state  treas- 
urer $25,000,  and  a  sum  equal  to  15 
per  cent,  of  the  deposits  made  in  such 
association  by  citizens  of  the  state,  to 
be  held  in  trust  by  said  treasurer  for 
the  protection  and  indenmity  of  the 
residents  of  the  state,  to  be  paid  out 
or  disposed  of  only  on  the  order  of 
some  court  of  competent  jurisdiction. 

New  York — Deposit  with  Superintendent  of  Banks : 
Certificate  of  deposit.  National  Sav- 
ings Bank,  Albany      .         .         .         Sl.OOO.OO 
First  mortgages      ....         99,000.00 


$70,087.90 


This  deposit  is  made  under  the  re- 
quirements of  the  General  Laws  of  New 
York,  chap.  37,  sec.  14,  and  chap.  682 
of  the  Laws  of  1892,  which  provides 
that  the  deposit  shall  be  held  by  the 
superintendent  of  banks  "in  trust  as 
security  for  the  depositors  with  and 
creditors  of  such  corporation,  and  sub- 
ject to  sale  and  transfer  and  to  the 
disposal  of  the  proceeds  thereof  by  the 
superintendent  only  on  the  order  of  a 
court  of  competent  jurisdiction." 
New  Jersey — Deposited  with  banking  department : 

First  mortgages      .... 


This  deposit  is  made  under  the  laws 
of  New  Jersey,  1890,  chap.  251 ,  sec.  3, 
which  requires  every  such  corporation 
to  deposit  with  the  secretary  of  state 
such  securities  as  they  may  prescribe, 
amounting  to  at  least  $30,000,  which 
securities  shall  be  held  by  the  secre- 
tary of  state  in  trust  for  the  benefit  of 
creditors  of  such  corporation  within 
this  state. 


100,000.00 


30,000.00 
$200,087.90 


31 


LOANS  ON  SHARES,  $14,066. 

This  item  represents  loans  made  by 
the  Association  on  its  own  shares, 
ranging  from  $25  to  $1,000.  There 
are  seventy-three  loans  in  all,  aggre- 
gating the  above  amount.  On  forty- 
six  loans,  aggregating  $6,024,  no  in- 
terest has  ever  been  paid ;  and  interest 
on  the  remainder  is  generally  in  de- 
fault. In  several  instances  loans  have 
been  made  in  excess  of  book  value  of 
shares,  such  excess  amounting  to  $823. 
In  other  cases  fines  charged  against  the 
shares  have  entirely  closed  them  out  as 
assets,  under  this  item. 

NOTES   RECEIVABLE,— $12,190.40. 

This  item  is  made  up  as  follows  : 

Note  of  A.  C.  Garcia  &  Co.,  of  New 
York,  dated  September  26,  1894, 
for  six  months,  endorsed  by  C.  S. 
Osborn  and  J.  C.  Moore,     . 

The  note  was  duly  protested,  and 
other  efforts  made  to  collect,  in- 
volving costs  of    .... 

Joint  note  of  O.  B.  Crum  and  F.  B. 
Crum,  dated  June  8,  1893,  for 
three  years,  endorsed  by  E.  W. 
Lowrey  and  G.  P.  Stewart,  .  1,000.00 

Note  of  J.  C.  Moore,  dated  Novem- 
ber 22, 1894,  on  demand,  with  col- 
lateral, as  follows  : — Fifty  shares 
Union  Publishing  Co.'s  stock, 
par  value,  $5,000 ;  note  of  Hali- 
fax Mills  Co.,  dated  April  26, 
1893,  for  four  months,  for  $5,000, 
endorsed  by  the  New  Hampshire 
Trust  Co.,  which  endorsement  is 
protected  by  collateral  described 
below.  On  this  note  $2,000  has 
been  paid,  leaving  as  collateral 
for  tlie  Moore  note,  $3,000, 


$14,066.00 


$1,000.00 
27.22 


8,000.00 
$10,027.22 


.* 


32 


Brought  forward^ 

This  was  given  to  the  Association  in 
payment  of  the  Halifax  Mills  Compa- 
ny's note  of  $5,000,  and  $3,000  in 
cash,  Moore  leaving  the  Halifax  Mills 
Company's  note  with  the  Association 
as  collateral  for  his  note.  The  $2,000 
paid  on  the  Halifax  Mills  Company's 
note  is  also  a  payment  on  the  Moore 
note,  therefore  this  item  of  assets  is 
shown  as  $2,000  too  large. 

Certificate  of  deposit,  New  Hampshire 
Trust  Co.  for  $25,000,  dated 
June  27,  1893,  less  office  rents 
and  payments  applied  of  $22,- 
836.82,  leaving  a  balance  due  on 
this  and  protected  by  collateral  as 
shown  below,       .... 

The  New  Hampshire  Trust  Com- 
pany, for  its  own  debt  of  $2,163.18, 
and  liability  as  endorser  of  the  Hali- 
fax Mills  Company's  note  (which  the 
Association  purchased  from  the  Trust 
Company),  deposited  with  the  Associa- 
tion certain  mortgages,  notes  with  col- 
lateral, and  an  assignment  of  its  equity 
in  notes  pledged  for  a  debt,  with  Pear- 
main  &  Brooks  of  Boston. 


$10,027.22 


2,163.18 


$12,190.40 


SECURITIES  FOR  GUARANTY  FUND,  $6,500. 

Notes  of  Moosehead  Pulp  &  Paper 
Co.,  secured  by  first  mortgage 
bonds  of  the  same  company,  de- 
posited with  New  Hampshire 
Trust  Co.    ..... 


100  shares  of  stock  of  the  National 
Bank  of  the  Commonwealth  at 
Manchester,  carried  at  25  per 
cent,  of  par  value 

These  items  are  the  only  assets  set 
aside  for  the  guaranty  fund,  now 
amounting  to  $28,765.53,  as  shown 
in  liabilities. 


$4,000 


2,500 


$6,500 


I 


i 


33 


ACCOUNTS   RECEIVABLE,— $66,598.30. 


In  hands  of  agents  and  attorneys :  Col- 
lections and  advances  for  loans,  not 
accounted  for  by  proper  vouchers  $42,917.30 

Included  in  this  is  $9,163.90  in  hands  of 
Denver  agent,  the  amount  of  which  is  in 
dispute;  also  $24,775  sent  to  Texas  agents 
to  complete  loans,  for  which  the  Associar 
tion  has  neither  notes  nor  mortgages. 
National  Bank,  of  Barre,  Vt.,  collections,  .  5,235.99 
G.  P.  Stewart,  personal  .         .        •  412.60 

New  Hampshire  Trust  Co.,  deposit  trusteed,  600.00 

Clerk  of  Supreme  Court,  Hillsborough 
Co.,  deposit  as  tender  on  account  of 
pending  litigation,  (paid  to  claimant  by 
order  of  court,)  ....  488.60 

J.  J.  Wilmarth:  Error  in  ledger  account, 
offset  in    liabilities,   "first   mortgages 

sold," 600.00 

Foreclosure  costs,  and  repairs  on  real  es- 
tate, to  which  title  has  not  been  per- 
fected         1,236.40 


$51,490.89 


Insurance  paid  : 

On  real  estate,     . 
Advanced  to  members. 
On  loans,  since  cancelled. 

Taxes  paid : 

On  real  estate. 
Advanced  to  members, 
On  accounts  closed. 

State  taxes : 

Maine, 
Kentucky,    . 

X  6XwS^  •  •  • 

Michigan,    . 

City  of  Richmond,  Va., 


3 


$1,133.30 

859.43 

72.25 


2,064.98 


$4,034.20 

1,063.04 

9.53 


5,106.77 


$130.31 

142.17 

110.00 

722.71 

25.00 


1,130.19 
$59,792.83 


34 


Brought  forward, 

UncoUectable   accounts ;    being  sundry  ac- 
counts of    agents'    shortage,   collections 
attached,  costs,  etc.. 


Less  journal  cross  entry. 


$59,792.83 


6,872.47 

$66,665.30 
67.00 


$66,598.30 


REAL  ESTATE,— $99,897.09. 

This  item  represents  real  estate  acquired 
by  foreclosure  of  mortgages,  with  ex- 
penses added,  and  payments  from 
members  substracted,  as  follows : 

Amount  loaned, $107,000.00 

Expenses  added,  ....  15,773.42 

Total  cost, $122,773.42 

Less   dues,  interest,  premiums,  and    rents 


received, 


22,876.33 


There  are  also  mortgages  foreclosed  and 
in  process  of  foreclosure  amounting  to 
$223,250.00  which  have  not  been  trans- 
ferred to  real  estate  account,  but  are  carried 
as  mortgage  loans. 

OFFICE   FIXTURES. 

Furniture,  etc.,  in  Manchester  office, 

ACCRUED    INTEREST  AND  PREMIUM.-$68,339.98. 

Unpaid  interest  and  premium,  as  follows : 
On  loans  secured  by  mortgages  which 
have  been  foreclosed,  but  not  trans- 
ferred to  real  estate  account,  and  on 
loans  secured  by  mortgages,  in  pro- 
cess of,  and  to  be  foreclosed,  $36,468.54 

On  loans  secured  by  mortgages,  where  de- 
fault warrants  expectancy  of  fore- 
closure,     ....••     12,656.41 

On  loans  secured  by  mortgages,  which  may 

be  regarded  as  good,  .         .         •     19,215.03 


$99,897.09 


/. 


$6,274.06 


$68,339.98 


i 


35 


CASH  ON  HAND  AND  IN  BANKS,— f58,462.27. 

This  item  is  made  up  of  deposits  in : 

Mercantile  Nat'l  Bank,  Dallas,  Tex. 
Manchester  Nat'l  Bank, 
Franklin  Nat'l  Bank,  N.  Y., 
Nashua  Trust  Co.       .... 
Merchants  Nat'l  Bank,  Manchester,    . 


$3,181.18 

35,699.16 

10,628.72 

7,000.00 

4,000.00 


Less  deposits  Jan.  7,  1896,  not  entered  on  books  of 
Association  ...... 


$60,509.06 

2,046.79 

$58,462.27 


LLA.BILITIES. 


INSTALMENT  SHARES,— $806,837.94. 


This  item  represents  amount  of  capital  dues  on 
instalment  shares  paid  in  by  members,  less  expenses, 
fines  and  losses  occurring  by  withdrawals,  commis- 
sions paid  agents,  and  shrinkage  of  values. 


Amount  of  dues  paid  in 
Less  expense  fund 

"     fines 

*'     losses 

"     legal  expenses    . 


$532,399.50 
16,273.22 
64.656.09 
42,803.83 


$1,462,970.58 


656,132.64 
$806,837.94 


ADVANCE  FUND,— $28,354.35. 

This   item   represents   payments   in   advance    on 
instalment  shares,  less  losses. 

Amount  paid  in  ...... 

Less  losses  ....... 


.  $30,626.57 
2,272.22 

$28,354.35 


PAID-UP  STOCK,— $488,781.51. 

This  item  represents  fully-paid  stock  bearing  inter- 
est from  6  to  10  per  cent.,  together  with  withdrawal 
certificates,  bearing  4  per  cent,  interest,  less  expenses, 
as  follows : 


1" 


a 


14 


It 


36 


PAID-UP    FUND. 

Amount  paid  in  by  members : 

Fully-paid  stock,  10  per  cent. 

and  part-paid  stock,  8  per 
cent.      .         .         .         • 
stock,  6  per  cent. 
"      7  per  cent. 
"      6  and  7  per  cent, 
participating  stock,   6   per 
cent.      .... 
Trustee  stock,  fully-paid,  6  per  cent. 
Withdrawal   certificates,   4   per   cent. 
(Face  value  $77,800.90)      . 

Deducted  for  Expense  Fund  : 

*  Fully-paid  stock,  10  per  cent. 

and  part-paid  stock,  8  per 
cent.      .... 
stock,  6  per  cent. 
7  per  cent. 
6  and  7  per  cent, 
participating   stock,  6  per 
cent.     .... 


$5,300.00 

108,600.00 

129,425.00 

95,550.00 

54,175.00 

114,365.00 
3,545.00 

235,097.25 


$746,057.25 


n 


ki 


44 


44 


ii 


ii 


*  Trustee  stock,  fuUy  paid,  6  per  cent. 
Withdrawal  certificate,  4  per  cent. 


Deducted  for  losses    . 


$18,100.04 

13,434.87 

12,421.50 

5,417.50 

11,436.50 

$60,810.41 

157,296.75 


$218,107.16 

$527,950.09 
39,168.58 


Liability  under  this,  as  shown  by  Association's  book,     $488,781.51 
*0n  the  10  per  cent,  fully-paid  stock  $16.67  per 

share   was  charged   to   profit   and   loss   account   as 

expenses. 

*  On  the  trustee  stock,  10  per  cent,  was  charged  to 

profit  and  loss  account  as  expenses. 

PERMANENT  SHAREHOLDERS'  FUND,— $100,000.00. 

This  fund  was  created  as  a  substitute  for  the  Guar- 
anty Agency  Co.,  as  described  on  pages  23  to 
26,  inclusive,  of  this  report.  The  $100,000 
common  stock  therein  referred  to  is  not  shown 
on  the  Association's  books  as  a  liability.  This 
item  represents  the  "  Preferred  Stock,"         .         $100,000.00 


< 


> 


87 


FIRST  MORTGAGES  SOLD  AND  ASSUMED,— $1,391,654.67. 

Tliis  item  is  made  up  of  first  mort- 
gages sold  and  in  hands  of  others, 
of 11,360,904.67 

First  mortgages  sold,  in  liands  of 
others,  on  real  estate  acquired  by 
foreclosure  of  the  instalment 
mortgage    .....         22,150.00 

First  mortgage  on  deposit  with  New 
York  Banking  Dept.,  erroneously 
included  with  "first  mortgages 
sold,"  .         .         .         .         .  8,000.00 

J.  J.  Wilmarth,  error,  erroneously  in- 
cluded with  "first  mortgages 
sold," 600.00 


$1,391,654.67 


DUE  ON  UNCOMPLETED  LOANS,  $8,719.29. 

This  item  is  made  up  of  amounts  due 

to  borrowers  on  loans  made .         .  $2,537.81 

Due  agents         .....  3,890.09 

Due  Berlin  Manufacturing  Co.    .         .  1,818.00 

Due  sundry  credit  balances          .         .  540.39 

Less  journal  cross  entry 


$8,786.29 
67.00 

$8,719.29 


DUE  PERMANENT  SHAREHOLDERS'  FUND,  $7,932.61. 

Due  expense  fund  from  members'  payments. 
From  1888  to  Nov.  1890    .         .        .    $140,550.75 
From  1890  to  Jan.  7,  1896         .        .       752,961.19 
From  sundry  accounts         .         .         .         67,825.74 


Paid  expense  fund  from  1888  to  Jan.  7,  1896 
Balance  due   ...... 


$961,337.68 
953,405.07 


$7,932.61 


REVISION   BY   THE   BANK  COMMISSIONERS   OF   THE 
FINANCIAL   STATEMENT. 

As  the  result  of  this  examination,  the  Commission- 
ers find  the  cash  account  should  be  increased 
$5,835.99  by  transfers  from  accounts  receivable,  and 
that   sundry    corrections    amounting   to    $10,635.00 


A    r 


38 


should  be  made  reducing  both  assets  and  liabilities 
that  amount.  After  these  corrections,  which  are 
mere  matters  of  bookkeeping,  the  Commissioners 
believe  the  assets  are  overstated  and  the  liabilities 
understated  on  the  books  of  the  Association,  as 
shown  by  the  foregoing  statement,  and  should  be 
revised  as  follows : 

REDUCTION   OF   ASSETS. 

The  assets  should  be  reduced  under  the  several 
accounts,  as  shown  below,  for  reasons  given : 

Mortgage  Loans  :  Shrinkage  in  value 
of  securities,  as  estimated  by  the 
Association's  officers  at  the  annual 
meeting  held  Feb.  8,  1896  . 

Loans  on  Shares  :  Because  of  in- 
sufficient collateral 

Securities  for  Guaranty  Fund: 
Stock  of  Commonwealth  National 
Bank,  Manchester,  N.  H.     . 

Notes   Receivable:    Note  of  A.  C. 
Garcia  &  Co.,  and  costs  (worth- 
less)  ...... 

Note  of  J.  C.  Moore,  payment  of 
$2,000  not  credited  on  note,  and 
$3,000  because  of  insufficient  col- 
lateral        ..... 


Accounts  Receivable:  In  hands  of 

agents,  estimated  loss  . 
Uncollectable  accounts  . 
Sundry    amounts    expended;    fore 

closure  costs,  etc. 
Insurance    paid,  where    mortgages 

have  been  foreclosed    . 
Insurance  paid  on  accounts  closed 
Taxes  paid  on  real  estate  foreclosed 
Taxes  paid  on  accounts  closed 
State  taxes  paid 
Deposit  with  clerk  of  Supreme  Court, 

paid  to  claimant  by  order  of  court, 


Real  Estate  :  Shrinkage  in  value  as 
estimated  by  Association's  officers 
at  annual  meeting 

Office  Fixtures:  For  depreciation 
discount  of  one  third    . 


$1,027.22 


5,000.00 


$4,000.00 
6,872.47 

1,236.40 

1,133.30 

72.25 

4,034.20 

9.53 

1,130.19 

488.60 


V  J 


»        » 


$80,000.00 
823.00 

2,500.00 


6,027.22 


1      I 


4  • 


18,976.94 

20,000.00 
2,090.67 


39 


Accrued  Interest  and  Premiums  : 
Accrued  interest  and  premium  on 
loans  secured  by  mortgages  fore- 
closed ..... 
On  loans  secured  by  mortgages  that 
should  be  foreclosed    . 

Cash  on  Hand  and  in  Banks  :  Differ- 
ence between  bank  balances  and 
cash  account.  Association  carrying 
a  check  to  T.  K.  Dissette  as  a 
cash  item,  check  having  been  paid 
by  bank  reducing  cash  in  Man- 
chester National  Bank 


$36,468.54 
12,656.41 


49,124.95 


2,135.86 
$181,678.64 


INCREASE  OF   LIABILITIES. 


In  revising  the  statement  of  liabilities  the  Commissioners  have 
restored  to  members'  accounts  amounts  deducted  for  losses  and 
legal  expenses,  which,  in  their  opinion,  are  more  properly  charge- 
able to  earnings  or  assets  than  deductible  from  liabilities;  also 
amount  improperly  deducted  from  paid-up  stock,  for  expense  fund. 
There  has  been  added  interest  due  and  unpaid  on  first  mortgage 
loans  and  on  paid-up  stock ;  also  unearned  premium  on  mortgage 
loans,  representing  that  proportion  of  the  gross  premium  charged 
when  loans  were  made,  not  earned  at  the  time  of  this  examination  by 
reason  of  the  maturity  of  certain  loans  being  beyond  January  7, 1896. 

Instalment  Shares:  Should  be  in- 
creased by  restoration  of  amount 
charged  to  capital  dues  as  "losses," 

As  "  legal  expenses  "  . 

Payment  for  national  homestead  certi- 
ficates ..... 


$64,656.09 
42,803.83 


287.10 


Advance  Fund  :    Restoration  of  amount  charged  to 

advance  payments,  as  losses 
Paid-up     Stock:      Restoration      of 

amount  deducted  for  expense  fund 
Deducted  for  ''  losses  "... 


$60,810.41 


Interest  Due  and  Unpaid  :  On  first 

mortgages  sold     .         .         .         . 

On  paid-up  stock         .... 


39,168.58 


$13,398.20 
3,631.01 


Unearned  Premium  :  On  mortgage  loans 


$107,747.02 
2,272.22 

99,978.99 


17,029.21 
83,488.40 

$310,515.84 


.'       V 


-•     I    *■ 


40 


ADJUSTMENT   OF  SUNDRY   ACCOUNTS. 


600.00 


Transferred  from  accounts  receivable  to  cash  : 

Deposit  National  Bank,  Barre,  Vt.        $5,235.99 
Deposit  New  Hampshire  Trust  Co. 

Deducted  from  assets  and  liabilities : 

Berlin  Manufacturing  Co.  pay- 
ment ;  from  "  mortgage  loans  " 
and  "  due  on  uncompleted 
loans  '     . 

Perrin  payment ;  from  "  mortgage 
loans"  and  "due  on  uncom- 
pleted loans"  .... 

New  York  state  deposit;  from 
**  mortgage  loans,"  and  "  first 
mortgage  sold  " 

J.  J.  Wilmarth,  error ;  from  "  ac- 
counts receivable,"  and  "first 
mortgages  sold  "... 

Journal  cross  entry ;  from  "  ac- 
counts receivable  "  and  "  due 
on  uncompleted  loans  " 


$5,835.99 


$1,818.00 


150.00 


8,000.00 


600.00 


67.00 


$10,635.00 


U 


41 


EEVISED  STATEMENT  OF  ASSETS  AND  LIABILITIES. 


ASSETS. 


Mortgage  loans 

Deposits  with  states 

Loans  on  shares 

Notes  receivable 

Accounts  receivable 

Guaranty  fund 

Real  estate 

Ofl&ce  fixtures 

Accrued  interest  and  premium 

Cash  in  hand  and  in  banks 


$2,440,172.64 

200,087.90 

13,243.00 

6,163.18 
41,118.37 

4,000.00 
79,897.09 

4,183.39 
19,215.03 
62,162.40 


$2,870,243.00 


LIABILITIES. 


Instalment  shares 

Advance  fund     .... 

Paid-up  stock     .... 

Permanent  shareholders'  fund     . 

First  mortgages  sold  . 

Due  on  uncompleted  loans,  etc.    . 

Due  permanent  shareholders'  fund 

Interest  due  and  unpaid 

Unearned  premium     . 

Deficit     .... 


$914,584.96 

30,626.57 

588,760.50 

100,000.00 

1,383,054.67 

6,684.29 

7,932.61 

17,029.21 

83,488.40 


$3,132,161.21 
261,918.21 


While  the  deficit  shown  is  sufficient  cause  for  grave  alarm  as  to 
the  ability  of  the  Association  to  mature  its  shares  within  any  reason- 
able term  of  years,  it  does  not  clearly  indicate  its  actual  condition, 
owing  to  the  practice  (possibly  warranted  by  the  contracts  with 
members)  of  deducting  expenses  from  capital  dues,  thus  making  its 
liabilities  to  members  less  than  the  sum  paid  in  by  them.  If  to  the 
deficit  is  added  the  sum  of  $548,672.72,— the  amount  of  dues  taken 
for  expenses,  and  fines,— $810,590.93  is  found  as  the  amount  the 
Association  must  earn  in  order  to  pay  back  to  members  what  they 
have  paid  in,  and  the  question,  when  the  shares  can  be  matured,  in 
accordance  with  the  Association's  published  plans,  is  not  worth 
dwelling  upon,  as  it  is  perfectly  apparent  that  the  earning  power  of 
the  Association  can  never  accomplish  it,  and  shares  can  only  be 
matured  by  receipts  from  new  members. 

The  analysis  of  the  financial  statement  shows,  among  other  things, 
the  doubtful  value  of  the  mortgage  investment,  on  which  it  largely 
relies  to  produce  the  profits  to  mature  its  shares.     Deducting  the 


< 


42 

first  mortgages  sold  and  in  hands  of  others  from  the  $2,530,140.64 
real  estate  mortgages,  they  have  $1,169,235.97  in  mortgage  loans ; 
but  of  this  sum  over  $77,000.00  are  mortgages  the  Association  has 
had  to  redeem,  nearly  $420,000.00  are  simply  second  mortgages  or 
equities,  $8,000.00  are  pledged  to  the  state  of  New  York,  and 
$223,250.00  are  in  process  of  foreclosure,  leaving  but  $440,453.50 
in  straight  mortgage  investments  to  meet  a  liability  of  $1,663,972.03 
for  money  received. 

A  brief  recapitulation  of  the  condition  of  the  Association  as  found 
by  the  commissioners,  and  the  questions  that  seem  to  arise  there- 
under, are  as  follows : 

1st.  Does  the  charter  authorize  the  business  as  conducted  hereto- 
fore and  at  the  present  time  by  the  Association  ? 

2d.  Are  the  contracts  entered  into  by  the  Association  with  its 
members  mutual  and  equitable  ? 

In  the  judgment  of  the  commissioners,  a  business  having  so  many 
and  diverse  plans  is  liable  to  misuse ;  it  is  not  susceptible  of  intel- 
ligent supervision  by  examiners,  and  must  inevitably  lead  to  mis- 
understandings and  disappointment  on  the  part  of  those  who  join 
in  it,  of  which  many  instances  have  already  come  to  the  knowledge 
of  the  commissioners.  That  the  Association  proposes  to  repudiate 
such  portions  of  its  contracts  as  are  unequal,  does  not  obviate  the 
objection.  It  cannot  set  up  its  own  wrongful  acts  as  an  excuse  for 
not  fulfilling  its  promises,  and  retain  the  confidence  of  the  members 
and  of  the  public.  To  what  extent  contracts  are  invalid  and  are 
to  be  disregarded  should  be  determined  only  by  the  court,  who  will 
administer  such  property  as  there  is  for  the  equal  benefit  of  all. 

3d.  Certain  losses  have  occurred  from  the  withdrawal  of  larger 
sums  than  the  member's  proportionate  share  by  reason  of  unwise  or 
invalid  contracts  made  by  the  management,  by  rebating  gross 
premiums,  and  by  the  maturing  of  shares  by  an  unequal  division  of 
the  profits.  Whether  it  is  possible  to  reimburse  the  members  for 
these  losses,  from  whom,  and  by  what  proceedings,  is  the  province 
of  the  attorney  general  to  determine. 

4th.  The  practice  of  issuing  paid-up  stock  which  shares  in  the 
profits  of  the  Association,  and  at  the  same  time  receives  high  rates 
of  interest  on  the  money  invested,  is  a  burden  on  the  instalment 
shareholder  and  borrower,  which,  in  the  judgment  of  the  commis- 
sioners, should  not  be  permitted. 

5th.  The  proportion  of  shares  borrowed  upon  is  so  small  in  com- 
parison with  the  total  number,  that  it  shows  the  principles  on  which 
building  and  loan  associations  are  founded  have  been  disregarded 
by  this  Association  in  its  business,  throwing  so  large  a  burden  on 
the  borrowers  that,  in  the  judgment  of  the  commissioners,  the  shares 
cannot  be  matured  within  a  reasonable  time. 

6th.  The  great  extent  of  territory  over  which  investments  are 


\   I^ 


i 
f 


-( 


I 


43 

made,  and  the  impossibility  of  proper  inspection  of  the  property, 
render  the  mortgages  of  the  Association  of  uncertam  value. 

7th.  The  sale  to  third  parties  of  a  first  mortgage  on  property  in 
which  the  greater  part  of  the  money  of  the  Association  is  invested, 
and  without  a  fund  which  can  be  used  to  redeem  the  dominant 
encumbrance,  destroys  the  value  of  the  investment  as  an  asset 
whenever  a  disturbance  occurs  or  a  distrust  is  created  m  the  insti- 
tution, and  is  Ukely  to  result  in  a  very  serious  shrinkage  to  the 

members.  ,   ,     ^.       i 

8th.  The  right  to  carry  a  surplus,  without  deducting  losses  as 
they  occur,  and  to  apportion  it  as  a  profit  among  its  members  as 
the  managers  may  from  time  to  time  determine,  whether  it  exists 
by  virtue  of  agreements  with  its  members,  or  by  statute,  is  so  con- 
trary to  equity  and  sound  business  principles,  that  it  should  not  be 
permitted  to  be  exercised. 

9th.  In  the  judgment  of  the  Commissioners,  the  expenses  ot  the 
Association  have  been  larger  than  the  business  warranted,— so  large 
that  a  suspicion  of  want  of  good  faith  on  the  part  of  those  author- 
izing the  expense  is  created.  The  members  should  not  be  made  to 
suffer  longer  by  the  enormous  commissions  paid  to  agents  or 
absorbed  in  dividends  to  the  permanent  guaranty  shareholders 
fund ;  and  it  would  be  more  to  their  advantage  that  the  Associa- 
tion should  be  wound  up  rather  than  to  continue  such  payments. 

10th.  The  payment  of  items  of  expense  incurred  in  the  sohcita- 
tion  of  business,  taxes  by  banking  departments,  traveUing  expenses, 
influence,  losses  by  agents,  and  legal  expenses,  are  properly  charge- 
able against  the  Guaranty  Agency  Company  if  its  contract  with  the 
Association  is  valid,  and  should  be  recovered  back  from  its  stock- 
holders. 

11th.  If  the  contract  with  the  Guaranty  Agency  Company  was  a 
valid  one,  can  the  burden  of  the  contracts  with  its  employees,  the 
general  agents,  be  shifted  onto  the  Association  whenever  the 
Agency  Company  dissolves  its  connection  with  the  Association  ? 

12th.  In  a  mutual  company  there  can  be  no  question  but  that 
any  excess  of  the  expense  fund  over  the  actual  expenditures  should 
be  repaid  to  the  members,  Whether  the  contracts  with  the  Agency 
Company,  providing  for  the  diversion  of  such  surplus,  is  valid,  and 
whether  money  unlawfuUy  paid  to  the  company  can  be  recovered  of 
it  or  its  stockholders,  are  questions  for  the  determination  of  the 

attorney  general. 

13th.  It  is  evident  that  great  efforts  have  been  made  to  secure  a 
large  number  of  new  members,  whose  money  seems  to  have  been 
needed  by  the  Association  in  order  to  fulfil  the  promises  held  out 
to  the  public.  Any  business  depending  upon  the  collections  from 
new  members  is  against  public  policy,  and  has  not  been  permitted 
to  continue  in  New  Hampshire. 

14th.  The  diversion  of  any  surplus  of  the  amount  set  aside  for 


u 


44 

expenses  from  the  members'  dues,  over  the  actual  cost  of  carrying 
on  the  business  of  the  Association,  is  no  more  justifiable  under  the 
plan  adopted  by  the  directors  creating  the  permanent  shareholders' 
fund  than  under  the  contract  with  the  Guaranty  Agency  Company. 
Whether  the  adoption  of  this  plan  by  the  Association  is  valid,  is 
submitted  to  the  attorney  general. 

15th.  When  a  financial  institution  under  state  supervision  makes 
contracts  with  its  patrons  which  are  generally  misunderstood,  it 
should  be  prohibited  from  continuing  the  business.  While  it  is 
impossible  to  state  how  many  of  the  members  of  this  Association 
understand  the  conditions  annexed  to  their  shares,  so  many  in- 
stances of  a  total  misconception  of  them,  and  of  the  rights  of  with- 
drawal, have  come  to  the  attention  of  the  commissioners  that  they 
are  led  to  believe  the  larger  part  of  the  shareholders  are  ignorant 
of  the  true  nature  of  their  investment. 

16th.  It  clearly  appears  that  the  250  sharps  of  8  per  cent,  stock 
held  by  Mr.  Stewart  were  not  matured ;  because  of  the  improper 
apportionment  of  profits;  because  the  age  of  the  shares  was  in- 
creased by  ante-dating  them  six  months  before  the  time  of  their 
issue ;  and  because  losses  were  not  deducted  from  the  profits  cred- 
ited to  them  at  the  time  of  the  apportionment.  The  payment  of 
$48,251.50  to  Mr.  Stewart  on  Oct.  3d,  1895,  was  illegal,  and  steps 
should  be  taken  for  its  recovery. 

The  many  doubtful,  if  not  dangerous,  plans  and  methods  of  busi- 
ness adopted  by  the  Association,  the  extreme  uncertainty  of  the 
value  of  its  assets,  the  almost  certain  shrinkage  or  dissipation  of 
values  in  case  the  members  default  in  their  regular  payments,  and 
the  many  questions  of  a  legal  nature  which  arise  upon  consideration 
of  its  contracts,  have  caused  the  commissioners  to  deem  it  neces- 
sary for  the  public  safety  that  they  lay  the  facts  in  writing  before 
the  attorney  general,  and  require  him  to  file  an  information  against 
the  corporation  for  the  purpose  of  vacating  its  charter,  as  author- 
ized by  section  14,  chapter  162  of  the  Public  Statutes,  as  well  as  to 
petition  the  supreme  court  that  a  receiver  be  appointed  to  take 
charge  of  the  property  and  effects  of  said  Association,  and  that  the 
court  will  prescribe  such  orders  and  rules  as  may  be  necessary  in 

the  premises. 

Alpheus  W.  Baker, 

John  Hatch, 
Thomas  J.  Walker, 

Bank  Commissioners. 


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Ne;v  Hampshire  Ba  of  Bank 

Coimniss  loners. 
Special  report March  1896 


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